Global liquidity trap

Ippei Fujiwara, Tomoyuki Nakajima, Nao Sudo, Yuki Teranishi

Research output: Contribution to journalArticle

9 Citations (Scopus)

Abstract

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 characterize 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 well in this respect.

Original languageEnglish
Pages (from-to)936-949
Number of pages14
JournalJournal of Monetary Economics
Volume60
Issue number8
DOIs
Publication statusPublished - 2013 Nov 1

Keywords

  • International spillover
  • Monetary policy cooperation
  • Two-country model
  • Zero interest rate policy

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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