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Global liquidity trap

  • Fujiwara, Ippei
  • Nakajima, Tomoyuki
  • Sudo, Nao
  • Teranishi, Yuki

How should monetary policy respond to a “global liquidity trap,” where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterize optimal monetary policy, and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. The interest-rate rule targeting the producer price index performs well in this respect.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 8 ()
Pages: 936-949

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Handle: RePEc:eee:moneco:v:60:y:2013:i:8:p:936-949
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Michael Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibiity," Discussion Papers in Economics at the University of Washington 0016, Department of Economics at the University of Washington.
  2. Ippei Fujiwara & Tomoyuki Nakajima & Nao Sudo & Yuki Teranishi, 2011. "Global Liquidity Trap," KIER Working Papers 780, Kyoto University, Institute of Economic Research.
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