Global Liquidity Trap

Fujiwara, Ippei; Nakajima, Tomoyuki; Sudou, Nao; Teranishi, Yuki

doi:10.2139/ssrn.2269427

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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

Yuki Teranishi

Bank of Japan - Institute for Monetary and Economic Studies

There 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: 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