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Helicopter Drops and Japanfs Liquidity Trap

  • Laurence Ball

    (Johns Hopkins University (E-mail:

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's economic slump and deflation as of 2003. According to the results, money-financed transfers totaling 9.4% of GDP end the output slump and guide the economy to a steady state with 2% inflation. By raising output and inflation, the policy also reduces the ratio of government debt to GDP. The policy'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.

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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 08-E-04.

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Date of creation: Mar 2008
Date of revision:
Handle: RePEc:ime:imedps:08-e-04
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