IDEAS home Printed from https://ideas.repec.org/p/dpr/wpaper/0748.html
   My bibliography  Save this paper

Zero Nominal Interest Rates, Unemployment, Excess Reserves and Deflation in a Liquidity Trap

Author

Listed:
  • Ryu-ichiro Murota
  • Yoshiyasu Ono

Abstract

We present a dynamic and monetary model that consistently explains such various phenomena as unemployment, deflation, zero nominal interest rates and excess reserves held by commercial banks. These phenomena are commonly observed during the Great Depression in the United States, the recent long-run stagnation in Japan, and the worldwide financial crisis triggered by the US subprime loan problem of 2008. We show that an excessive liquidity preference leads to a liquidity trap and thereby generates the phenomena.

Suggested Citation

  • Ryu-ichiro Murota & Yoshiyasu Ono, 2009. "Zero Nominal Interest Rates, Unemployment, Excess Reserves and Deflation in a Liquidity Trap," ISER Discussion Paper 0748, Institute of Social and Economic Research, Osaka University.
  • Handle: RePEc:dpr:wpaper:0748
    as

    Download full text from publisher

    File URL: http://www.iser.osaka-u.ac.jp/library/dp/2009/DP0748.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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(2), pages 137-206.
    2. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
    4. Orphanides, Athanasios, 2004. "Monetary policy in deflation: the liquidity trap in history and practice," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 101-124, March.
    5. Jones, Barry & Asaftei, Gabriel & Wang, Lian, 2004. "Welfare Cost Of Inflation In A General Equilibrium Model With Currency And Interest-Bearing Deposits," Macroeconomic Dynamics, Cambridge University Press, vol. 8(04), pages 493-517, September.
    6. Ken-ichi Hashimoto, 2004. "Intergenerational Transfer and Effective Demand," Economics Bulletin, AccessEcon, vol. 5(1), pages 1-13.
    7. Fujiki, Hiroshi & Okina, Kunio & Shiratsuka, Shigenori, 2001. "Monetary Policy under Zero Interest Rate: Viewpoints of Central Bank Economists," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(1), pages 89-130, February.
    8. Ono, Yoshiyasu, 2001. "A Reinterpretation of Chapter 17 of Keynes's General Theory: Effective Demand Shortage under Dynamic Optimization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 207-236, February.
    9. Yoshiyasu Ono, 2006. "International Asymmetry In Business Activity And Appreciation Of A Stagnant Country'S Currency," The Japanese Economic Review, Japanese Economic Association, vol. 57(1), pages 101-120.
    10. David C. Wheelock, 1992. "Monetary policy in the Great Depression: what the Fed did and why," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-28.
    11. Alejandro Rodríguez-Arana, 2007. "Inflation And The Public Deficit When The Utility Of Money Is Insatiable," The Japanese Economic Review, Japanese Economic Association, vol. 58(2), pages 238-254.
    12. Carl E. Walsh, 1984. "Optimal Taxation by the Monetary Authority," NBER Working Papers 1375, National Bureau of Economic Research, Inc.
    13. Johdo, Wataru & Hashimoto, Ken-ichi, 2009. "International relocation, the real exchange rate and effective demand," Japan and the World Economy, Elsevier, vol. 21(1), pages 39-54, January.
    14. Gregor W. Smith, 2008. "Japan's Phillips Curve Looks Like Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1325-1326, September.
    15. James A. Wilcox, 1984. "Excess Reserves in the Great Depression," NBER Working Papers 1374, National Bureau of Economic Research, Inc.
    16. Kazuo Ogawa, 2004. "Why Commercial Banks Held Excess Reserves: The Japanese Experience of the Late '90s," ISER Discussion Paper 0625, Institute of Social and Economic Research, Osaka University.
    17. Wataru Johdo, 2006. "Geographical Space And Effective Demand Under Stagnation," Australian Economic Papers, Wiley Blackwell, vol. 45(4), pages 286-298, December.
    18. Daisuke Matsuzaki, 2003. "The Effects of a Consumption Tax on Effective Demand under Stagnation," The Japanese Economic Review, Japanese Economic Association, vol. 54(1), pages 101-118.
    19. repec:ebl:ecbull:v:5:y:2004:i:1:p:1-13 is not listed on IDEAS
    20. Simonsen, Mario Henrique & Cysne, Rubens Penha, 2001. "Welfare Costs of Inflation and Interest-Bearing Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 90-100, February.
    21. Johdo, Wataru, 2008. "Is Openness Good for Stagnation?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 24-41.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Khemraj, Tarron, 2011. "The Non-Zero Lower Bound Lending Rate and the Liquidity Trap," MPRA Paper 42030, University Library of Munich, Germany, revised 01 May 2012.
    2. Vespignani, Joaquin L. & Ratti, Ronald A., 2016. "Not all international monetary shocks are alike for the Japanese economy," Economic Modelling, Elsevier, vol. 52(PB), pages 822-837.
    3. Ryu-ichiro Murota & Yoshiyasu Ono, 2015. "Fiscal Policy under Long-run Stagnation: A New Interpretation of the Multiplier Effect," ISER Discussion Paper 0937, Institute of Social and Economic Research, Osaka University.
    4. Ryu-ichiro Murota & Yoshiyasu Ono, 2010. "A Reinterpretation of the Keynesian Consumption Function and Multiplier Effect," ISER Discussion Paper 0779, Institute of Social and Economic Research, Osaka University.
    5. Yoshiyasu Ono & Junichiro Ishida, 2014. "On Persistent Demand Shortages: A Behavioural Approach," The Japanese Economic Review, Japanese Economic Association, vol. 65(1), pages 42-69, March.
    6. Khemraj, Tarron, 2013. "Bank liquidity preference and the investment demand constraint," Economic Modelling, Elsevier, vol. 33(C), pages 977-990.
    7. Murota, Ryu-ichiro & Ono, Yoshiyasu, 2015. "Fiscal policy under deflationary gap and long-run stagnation: Reinterpretation of Keynesian multipliers," Economic Modelling, Elsevier, vol. 51(C), pages 596-603.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dpr:wpaper:0748. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fumiko Matsumoto). General contact details of provider: http://edirc.repec.org/data/isosujp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.