Financial crashes or liquidity trap.

Summary This paper examines unconventional monetary policies in a two-period general equilibrium model. Agents exchange goods and also collateralized financial assets through money. An unconventional policy of increasing the quantity of money leads to the existence of only three scenarios compatible with the equilibrium conditions: 1) the economy encounters a liquidity trap. 2) money creation makes trade possible, at the cost of inflation. 3) money creation feeds a bubble that causes a financial crash. This trilemma highlights the transmission channels of monetary policies to real trade. It provides a rigorous foundation for the distinction between Fischerian debt deflation and Keynesian liquidity traps.