 Optimal monetary policy in a liquidity trap: Evaluations for Japan’s monetary policyKohei Hasui and Yuki Teranishi Journal of the Japanese and International Economies, 2025, vol. 76, issue C Abstract: This paper shows (1) a positive analysis demonstrating that recent high inflation rates can be explained by the Bank of Japan (BOJ)’s monetary policy for the COVID-19 pandemic period, “Inflation-Overshooting Commitment,” and (2) a normative analysis showing that the BOJ’s inflation-overshooting commitment aligns with the optimal monetary policy in a liquidity trap within a new Keynesian model with inflation persistence. In detail, we calibrate a hybrid new Keynesian model by Japanese parameters and show optimal monetary policy under commitment. Optimal monetary policy prolongs the zero interest rate until the second quarter of 2024 even after inflation rates overshoot 2 percent. Similarly, the BOJ continues the zero interest rate policy until the second quarter of 2024. The current average inflation rates from 2023Q4 to 2024Q3 reach 2.6 percent and 2.5 percent in the data and the model, respectively. Keywords: Liquidity trap; Optimal monetary policy; Inflation persistence commitment policy; Forward guidance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:76:y:2025:i:c:s0889158325000103 DOI: 10.1016/j.jjie.2025.101361 Access Statistics for this article Journal of the Japanese and International Economies is currently edited by Takeo Hoshi More articles in Journal of the Japanese and International Economies from Elsevier |
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