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Zero Nominal Interest Rates, Unemployment, Excess Reserves and Deflation in a Liquidity Trap

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  • Ryu-ichiro Murota
  • Yoshiyasu Ono

Abstract

We present a dynamic and monetary model that consistently explains such various phenomena as unemployment, deflation, zero nominal interest rates and excess reserves held by commercial banks. These phenomena are commonly observed during the Great Depression in the United States, the recent long-run stagnation in Japan, and the worldwide financial crisis triggered by the US subprime loan problem of 2008. We show that an excessive liquidity preference leads to a liquidity trap and thereby generates the phenomena.

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Bibliographic Info

Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0748.

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Date of creation: Jul 2009
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Handle: RePEc:dpr:wpaper:0748

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  1. Simonsen, Mario Henrique & Cysne, Rubens Penha, 2001. "Welfare Costs of Inflation and Interest-Bearing Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 90-100, February.
  2. Yoshiyasu Ono, 2006. "International Asymmetry In Business Activity And Appreciation Of A Stagnant Country'S Currency," The Japanese Economic Review, Japanese Economic Association, vol. 57(1), pages 101-120.
  3. Wataru Johdo, 2008. "Production Subsidy As A Macroeconomic Policy In A Stagnation Economy," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 53(02), pages 317-333.
  4. Fujiki, Hiroshi & Okina, Kunio & Shiratsuka, Shigenori, 2001. "Monetary Policy under Zero Interest Rate: Viewpoints of Central Bank Economists," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(1), pages 89-130, February.
  5. Johdo, Wataru, 2008. "Is Openness Good for Stagnation?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 24-41.
  6. Daisuke Matsuzaki, 2003. "The Effects of a Consumption Tax on Effective Demand under Stagnation," The Japanese Economic Review, Japanese Economic Association, vol. 54(1), pages 101-118.
  7. Gregor Smith, 2006. "Japan's Phillips Curve Looks Like Japan," Working Papers 1083, Queen's University, Department of Economics.
  8. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
  9. Ono, Yoshiyasu, 2001. "A Reinterpretation of Chapter 17 of Keynes's General Theory: Effective Demand Shortage under Dynamic Optimization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 207-36, February.
  10. David C. Wheelock, 1992. "Monetary policy in the Great Depression: what the Fed did and why," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-28.
  11. Johdo, Wataru & Hashimoto, Ken-ichi, 2009. "International relocation, the real exchange rate and effective demand," Japan and the World Economy, Elsevier, vol. 21(1), pages 39-54, January.
  12. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
  13. Kazuo Ogawa, 2004. "Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late '90s," ISER Discussion Paper 0625, Institute of Social and Economic Research, Osaka University.
  14. Wataru Johdo, 2006. "Geographical Space And Effective Demand Under Stagnation," Australian Economic Papers, Wiley Blackwell, vol. 45(4), pages 286-298, December.
  15. James A. Wilcox, 1984. "Excess Reserves in the Great Depression," NBER Working Papers 1374, National Bureau of Economic Research, Inc.
  16. Athanasios Orphanides, 2004. "Monetary policy in deflation: the liquidity trap in history and practice," Finance and Economics Discussion Series 2004-01, Board of Governors of the Federal Reserve System (U.S.).
  17. Jones, Barry & Asaftei, Gabriel & Wang, Lian, 2004. "Welfare Cost Of Inflation In A General Equilibrium Model With Currency And Interest-Bearing Deposits," Macroeconomic Dynamics, Cambridge University Press, vol. 8(04), pages 493-517, September.
  18. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  19. repec:ebl:ecbull:v:5:y:2004:i:1:p:1-13 is not listed on IDEAS
  20. Carl E. Walsh, 1984. "Optimal Taxation by the Monetary Authority," NBER Working Papers 1375, National Bureau of Economic Research, Inc.
  21. Alejandro Rodríguez-Arana, 2007. "Inflation And The Public Deficit When The Utility Of Money Is Insatiable," The Japanese Economic Review, Japanese Economic Association, vol. 58(2), pages 238-254.
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Citations

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Cited by:
  1. Vespignani, Joaquin L. & Ratti, Ronald A., 2013. "Not all international monetary shocks are alike for the Japanese economy," MPRA Paper 48709, University Library of Munich, Germany.
  2. Khemraj, Tarron, 2011. "The Non-Zero Lower Bound Lending Rate and the Liquidity Trap," MPRA Paper 42030, University Library of Munich, Germany, revised 01 May 2012.
  3. Khemraj, Tarron, 2013. "Bank liquidity preference and the investment demand constraint," Economic Modelling, Elsevier, vol. 33(C), pages 977-990.
  4. Ryu-ichiro Murota & Yoshiyasu Ono, 2010. "A Reinterpretation of the Keynesian Consumption Function and Multiplier Effect," ISER Discussion Paper 0779, Institute of Social and Economic Research, Osaka University.

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