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Helicopter Drops and Japan fs Liquidity Trap


  • Laurence Ball


This paper examines the effects of a money-financed fiscal expansion? a helicopter drop?when an economy is in a liquidity trap. It uses a textbook-style model calibrated to fit Japan fs economic slump and deflation as of 2003. According to the results, money-financed transfers totaling 9.4 percent of GDP end the output slump and guide the economy to a steady state with 2 percent inflation. By raising output and inflation, the policy also reduces the ratio of government debt to GDP. The policy f s long-run effects are the same as those of a bond-financed fiscal expansion, but money finance prevents a short-run rise in debt.

Suggested Citation

  • Laurence Ball, 2008. "Helicopter Drops and Japan fs Liquidity Trap," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 26, pages 87-106, December.
  • Handle: RePEc:ime:imemes:v:26:y:2008:p:87-106

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    References listed on IDEAS

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    More about this item


    Helicopter drop; Liquidity trap; Deflation;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy


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