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Global liquidity trap

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  • Ippei Fujiwara, Tomoyuki Nakajima, Nao Sudo, Yuki Teranishi

Abstract

How should monetary policy respond to a global liquidity trap," where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterise optimal monetary policy, and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. The interest-rate rule targeting the producer price index performs very well in this respect.

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File URL: https://crawford.anu.edu.au/pdf/ajrc/wpapers/2013/201304.pdf
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Bibliographic Info

Paper provided by Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University in its series AJRC Working Papers with number 1304.

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Length: 32 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:csg:ajrcwp:1304

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Keywords: Zero interest rate policy; two-country model; international spillover; monetary policy coordination;

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