Global Liquidity Trap

48 Pages Posted: 14 Mar 2011 Last revised: 3 Aug 2024

See all articles by Ippei Fujiwara

Ippei Fujiwara

Australian National University (ANU) - Crawford School of Public Policy

Tomoyuki Nakajima

University of Tokyo

Nao Sudou

Bank of Japan

Yuki Teranishi

Bank of Japan - Institute for Monetary and Economic Studies

Date Written: March 2011

Abstract

In this paper we consider a two-country New Open Economy Macroeconomics model, and analyze the optimal monetary policy when countries cooperate in the face of a "global liquidity trap" - i.e., a situation where the two countries are simultaneously caught in liquidity traps. Compared to the closed economy case, a notable feature of the optimal policy in the face of a global liquidity trap is its international dependence. Whether or not a country's nominal interest rate is hitting the zero bound affects the target inflation rate of the other country. The direction of the effect depends on whether goods produced in the two countries are Edgeworth complements or substitutes. We also compare several classes of simple interest-rate rules. Our finding is that targeting the price level yields higher welfare than targeting the inflation rate, and that it is desirable to let the policy rate of each country respond not only to its own price level and output gap, but also to those in the other country.

Suggested Citation

Fujiwara, Ippei and Nakajima, Tomoyuki and Sudou, Nao and Teranishi, Yuki, Global Liquidity Trap (March 2011). NBER Working Paper No. w16867, Available at SSRN: https://ssrn.com/abstract=1784145

Ippei Fujiwara (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building #132 Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

Tomoyuki Nakajima

University of Tokyo ( email )

Yayoi 1-1-1
Bunkyo-ku
Tokyo, Tokyo 113-8657
Japan

HOME PAGE: http://https://sites.google.com/view/tomoyukinakajima/home

Nao Sudou

Bank of Japan ( email )

CPO Box 203
Tokyo, 100-91
Japan

Yuki Teranishi

Bank of Japan - Institute for Monetary and Economic Studies ( email )

2-1-1, Hongoku-cho
Nihonbashi
Chuo-ku, Tokyo, 103
Japan

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