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The Liquidity Trap and Japan

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  • Pui Chi Ip

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    Abstract

    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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    File URL: http://www.econ.mq.edu.au/research/2002/11-2002Ip.pdf
    File Function: First Version, 2002
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    Bibliographic Info

    Paper provided by Macquarie University, Department of Economics in its series Research Papers with number 0211.

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    Length: 21 pages.
    Date of creation: Dec 2002
    Date of revision:
    Handle: RePEc:mac:wpaper:0211

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    Web page: http://www.econ.mq.edu.au/
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    Keywords: Liquidity trap; Tobin's q; Japan;

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