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The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
2000 (English)Report (Other academic)
Abstract [en]

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
Keyword [en]
deflation, liquidity trap, nominal interest rates
National Category
URN: urn:nbn:se:su:diva-41164OAI: diva2:328722
Available from: 2010-07-07 Created: 2010-07-06 Last updated: 2010-08-16Bibliographically approved

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Svensson, Lars E.O.
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