Helicopter Drops and Japan's Liquidity Trap

Laurence Ball

No 08-E-04, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: This paper examines the effects of a money-financed fiscal expansion -- a helicopter drop -- when an economy is in a liquidity trap. It uses a textbook-style model calibrated to fit Japan's economic slump and deflation as of 2003. According to the results, money-financed transfers totaling 9.4% of GDP end the output slump and guide the economy to a steady state with 2% inflation. By raising output and inflation, the policy also reduces the ratio of government debt to GDP. The policy's long-run effects are the same as those of a bond-financed fiscal expansion, but money finance prevents a short-run rise in debt.

Keywords: Helicopter Drop; Liquidity Trap; Deflation (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E63 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Helicopter Drops and Japan's Liquidity Trap (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:08-e-04

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