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Global liquidity trap

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

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 characterise 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 very well in this respect.

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File URL: https://crawford.anu.edu.au/pdf/ajrc/wpapers/2013/201304.pdf
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Paper provided by Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University in its series AJRC Working Papers with number 1304.

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Length: 32 pages
Date of creation: 2013
Handle: RePEc:csg:ajrcwp:1304
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  11. Fujiwara, Ippei & Sudo, Nao & Nakajima, Tomoyuki & Teranishi, Yuki, 2010. "Global liquidity trap," Globalization and Monetary Policy Institute Working Paper 56, Federal Reserve Bank of Dallas.
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