In this paper we attempt to identify a set of criteria that an economy has to fulfil to fall into a deflationary trap. We argue that these conditions are not met to a sufficient degree by Switzerland and, accordingly, the risk of falling into such a trap is rather small. If an economy finds itself trapped, however, we suggest that the central bank still has alternative tools to reflate it, even if its policy interest rate has already reached the zero floor (the zero lower bound). In a small open economy, temporarily switching to an exchange rate operating target seems to be the most efficient approach. But other strategies including, as a last resort, collaboration with the fiscal authorities, are also theoretically available.
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Volume (Year): 140 (2004) Issue (Month): I (March) Pages: 127-170 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
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Other versions:
Benhabib, J. & Schmitt-Grohe, S. & Uribe, M., 1999.
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Working Papers
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