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Global liquidity trap

Author

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

Abstract

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.

Suggested Citation

  • Fujiwara, Ippei & Nakajima, Tomoyuki & Sudo, Nao & Teranishi, Yuki, 2013. "Global liquidity trap," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 936-949.
  • Handle: RePEc:eee:moneco:v:60:y:2013:i:8:p:936-949
    DOI: 10.1016/j.jmoneco.2013.08.004
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    More about this item

    Keywords

    Zero interest rate policy; Two-country model; International spillover; Monetary policy cooperation;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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