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Helicopter Drops and Japanfs Liquidity Trap

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Author Info
Laurence Ball (Johns Hopkins University (E-mail: lball@jhu.edu))
Abstract

This paper examines the effects of a money-financed fiscal expansion -- a helicopter drop -- when an economy is in a liquidity trap. It uses a textbook-style model calibrated to fit Japan's economic slump and deflation as of 2003. According to the results, money-financed transfers totaling 9.4% of GDP end the output slump and guide the economy to a steady state with 2% inflation. By raising output and inflation, the policy also reduces the ratio of government debt to GDP. The policy's long-run effects are the same as those of a bond-financed fiscal expansion, but money finance prevents a short-run rise in debt.

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File URL: http://www.imes.boj.or.jp/english/publication/edps/2008/08-E-04.pdf
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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 08-E-04.

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Date of creation: Mar 2008
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Handle: RePEc:ime:imedps:08-e-04

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Related research
Keywords: Helicopter Drop Liquidity Trap Deflation

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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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This page was last updated on 2008-9-18.

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