The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap
2000 (English)Report (Other academic)
The paper examines the transmission mechanism of monetary policy in an open economy with and without a binding zero bound on nominal interest rates. In particular, a foolproof way of escaping from a liquidity trap is suggested, consisting of a price-level target path, a devaluation of the currency and a temporary exchange rate peg, which is later abandoned in favor of price-level or inflation targeting when the price-level target has been reached. This will jump-start the economy and escape deflation by a real depreciation of the domestic currency, a lower long real interest rate, and increased inflation expectations. The abandonment of the exchange-rate peg and the shift to price-level or inflation targeting will avoid the risk of overheating. Some conclusions for Japan are included.
Place, publisher, year, edition, pages
Stockholm: IIES , 2000. , 53 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 687
deflation, liquidity trap, nominal interest rates
IdentifiersURN: urn:nbn:se:su:diva-41164OAI: oai:DiVA.org:su-41164DiVA: diva2:328722