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Japan Inside the Black Hole

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Author Info
Percy Ip () (Department of Economics, Macquarie University)
Abstract

When the demand for money is infinitely the interest elastic, injecting base money into the system is akin to money being sucked into a Black Hole. Economics activity will not be revived by driving the rate of interest to zero. Full employment can only be restored by a judicious combination of fiscal, monetary policy should aim at raising Tobin's q, not lowering the cost of funds. Deflation can be good or bad. 'Stagdeflation' is bad whilst 'growthdeflation' is good. Targeting inflation treats only the symptom, not the disease. Trade liberalisation by Japan is superior to yen depreciation as a means of exploiting the foreign trade multiplier to the benefit of the global as well as the Japanese economy.

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File URL: http://www.econ.mq.edu.au/research/2003/JIBH160603MU.pdf
File Format: application/pdf
File Function: First Version, 2003
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Publisher Info
Paper provided by Macquarie University, Department of Economics in its series Research Papers with number 0308.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 32 pages.
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:mac:wpaper:0308

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Postal: Sydney NSW 2109
Web page: http://www.econ.mq.edu.au/
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Related research
Keywords: monetary and fiscal policy; liquidity trap; inflation; deflation; stagflation; Japan;

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
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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    Other versions:
  2. 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(1998-2), pages 137-206. [Downloadable!]
  3. Buiter, Willem H & Panigirtzoglou, Nikolaos, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," CEPR Discussion Papers 2203, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Krugman, Paul, 2000. "Thinking About the Liquidity Trap," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 221-237, December. [Downloadable!] (restricted)
  5. Bennett McCallum, 2001. "Inflation targeting and the liquidity trap," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
    Other versions:
  6. Svensson, Lars E O, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," CEPR Discussion Papers 2566, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Thomas I. Palley, 2000. "The Case for Positive Low Inflation: Some Financial Market Considerations with Special Attention to the Problems of Japan," Eastern Economic Journal, Eastern Economic Association, vol. 26(3), pages 277-295, Summer. [Downloadable!]
  8. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    Other versions:
  9. Bennett T. McCallum, 2000. "Theoretical analysis regarding a zero lower bound on nominal interest rates," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 870-935.
    Other versions:
  10. J. Bradford DeLong, 1999. "Should We Fear Deflation?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1999-1), pages 225-252. [Downloadable!]
  11. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February. [Downloadable!] (restricted)
  12. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
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  15. Michael Hutchison, 2000. "Japan's recession: is the liquidity trap back?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Jun 16. [Downloadable!]
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