The Effect of Gesell Tax on Liquidity Trap: New Keynesian Approach

In the present system of capitalism, the money and interest rate have a special place in macroeconomics and play a major role in conducting monetary policies and determining economic activities level. Classical school believe that interest rate is a real phenomenon. However, Keynes argued that interest rate is a money phenomenon. Silvio Gesell reasoned that interest rate is due to the nature of currency. He proposed the free money system, in which the money without interest will also have active circulation. The nature of free money is in such a way that tax is proportional to the money duration of speculation. The objective of this study is to demonstrate the inability of monetary policy (raising inflation expectations) and in this regard, the impact of Gesell tax in escaping from the liquidity trap. Therefore, using the Mathematica software and calibrating a New-Keynesian model for Iranian economy, dynamics of the model were analyzed. The results indicate that an increase in target inflation rate will not affect escaping from liquidity trap. As a result, if the nominal interest rate on currency, on the basis of the rule (Gesell tax) is kept less than the nominal interest rate, the economy will never end up in a zero-bound equilibrium or in a liquidity trap.