The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap / Lars E.O. Svensson.

Format:

Book

Author/Creator:

Svensson, Lars E.O.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7957.

NBER working paper series no. w7957

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

The Zero Bound in an Open Economy

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Summary:

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 presented, 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.

Notes:

Print version record

October 2000.