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Global Liquidity Trap: A Simple Analytical Investigation

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  • Ippei Fujiwara

    (Director, Institute for Monetary and Economic Studies (currently, Financial Markets Department), Bank of Japan. (E-mail: ippei.fujiwara@boj.or.jp))

  • Nao Sudo

    (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan. (E-mail: nao.sudou@boj.or.jp))

  • Yuki Teranishi

    (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan. (E-mail: yuuki.teranishi@boj.or.jp))

Abstract

How should monetary policy cooperation be designed when more than one country simultaneously faces zero lower bounds on nominal interest rates? To answer this question, we examine monetary policy cooperation with both optimal discretion and commitment policies in a two- country model. We reach the following conclusions. Under discretion, monetary policy cooperation is characterized by the intertemporal elasticity of substitution (IES), a key parameter measuring international spillovers, and no history dependency. On the other hand, under commitment, monetary policy features history dependence with international spillover effects.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-31.

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Date of creation: Nov 2009
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Handle: RePEc:ime:imedps:09-e-31

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Keywords: Optimal Monetary Policy Cooperation; Zero Lower Bound;

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  1. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports, Federal Reserve Bank of New York 124, Federal Reserve Bank of New York.
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Cited by:
  1. Rod Tyers & Jenny Corbett, 2011. "Japan's Economic Slowdown and its Global Implications: A Review of the Economic Modelling," Economics Discussion / Working Papers, The University of Western Australia, Department of Economics 11-19, The University of Western Australia, Department of Economics.

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