Krugman on Japan's Liquidity Trap

Colin Rogers ()
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Colin Rogers: School of Economics, University of Adelaide

No 2001-01, School of Economics and Public Policy Working Papers from University of Adelaide, School of Economics and Public Policy

Abstract: The theoretical analysis of Japan's liquidity trap is developed by Krugman (1998a,b,c; 1999) in terms of both an ''intertemporal maximization'' framework and an ''absolutely conventional open economy IS-LM model''. In this note I examine the latter version of the story and argue that Krugman's analysis is obscured by reliance on the Fisher parity relationship. The distinction between the cost of capital and the return on capital is introduced to make sense of Krugman's analysis.

Pages: 6 pages
Date: 2001
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