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Global Liquidity Trap

Author

Listed:
  • Ippei Fujiwara

    () (Bank of Japan)

  • Tomoyuki Nakajima

    () (Kyoto University)

  • Nao Sudo

    () (Bank of Japan)

  • Yuki Teranishi

    () (Bank of Japan)

Abstract

Using a two-country New Open Economy Macroeconomics model, we analyze how monetary policy should respond to a "global liquidity trap," where the two countries may fall into a liquidity trap simultaneously. We first characterize optimal monetary policy, and show that the optimal rate of infl ation 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. We find that the interest-rate rule targeting the producer price index performs very well in this respect.

Suggested Citation

  • Ippei Fujiwara & Tomoyuki Nakajima & Nao Sudo & Yuki Teranishi, 2011. "Global Liquidity Trap," KIER Working Papers 780, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:780
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Zero interest rate policy; two-country model; international spillover; monetary policy coordination;

    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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