Global Liquidity Trap / Ippei Fujiwara, Tomoyuki Nakajima, Nao Sudo, Yuki Teranishi.

Format:

Book

Author/Creator:

Fujiwara, Ippei.

Contributor:

National Bureau of Economic Research.

Nakajima, Tomoyuki.

Sudo, Nao.

Teranishi, Yuki.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16867.

NBER working paper series no. w16867

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

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.

Notes:

Print version record

March 2011.