Global Liquidity Trap

33 Pages Posted: 24 May 2013

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

Multiple version iconThere are 2 versions of this paper

Date Written: May 23, 2013

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 characterise 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. Next, we 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 very well in this respect.

Keywords: Zero interest rate policy, two-country model, international spillover, monetary policy

JEL Classification: E52, E58, F41

Suggested Citation

Fujiwara, Ippei and Nakajima, Tomoyuki and Sudou, Nao and Teranishi, Yuki, Global Liquidity Trap (May 23, 2013). Available at SSRN: https://ssrn.com/abstract=2269427 or http://dx.doi.org/10.2139/ssrn.2269427

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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