Monetary policy may be effective in stabilising income via the real balance effect and the exchange rate channel. Even though interest rates of government bonds are subject to a zero lower bound, fiscal and monetary policy may be employed to change Tobin's q in a multi-asset model and thereby stimulate investment. Foreign exchange intervention, whether sterilised or non-sterilised, may have a positive impact on economic activity. Instead of emphasising inflation targeting, non-monetary policies should be adopted to stimulate aggregate demand to extricate Japan from the liquidity trap. Deflation is the consequence not the cause of the current recession.
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Paper provided by Macquarie University, Department of Economics in its series Research Papers with number
0211.
Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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