The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap

Lars Svensson

Monetary and Economic Studies, 2001, vol. 19, issue S1, 277-312

Abstract: 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.

JEL-codes: E31 E43 E52 F41 (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (287)

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Related works:
Working Paper: The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap (2000)
Working Paper: The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap (2000)
Working Paper: The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imemes:v:19:y:2001:i:s1:p:277-312

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