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The Liquidity Trap and Japan


  • Pui Chi Ip



Monetary policy may be effective in stabilising income via the real balance effect and the exchange rate channel. Even though interest rates of government bonds are subject to a zero lower bound, fiscal and monetary policy may be employed to change Tobin's q in a multi-asset model and thereby stimulate investment. Foreign exchange intervention, whether sterilised or non-sterilised, may have a positive impact on economic activity. Instead of emphasising inflation targeting, non-monetary policies should be adopted to stimulate aggregate demand to extricate Japan from the liquidity trap. Deflation is the consequence not the cause of the current recession.

Suggested Citation

  • Pui Chi Ip, 2002. "The Liquidity Trap and Japan," Research Papers 0211, Macquarie University, Department of Economics.
  • Handle: RePEc:mac:wpaper:0211

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    More about this item


    Liquidity trap; Tobin's q; Japan;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies


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