EconPapers    
Economics at your fingertips  
 

The Case for Open-Market Purchases in a Liquidity Trap

Alan Auerbach and Maurice Obstfeld

No 4447, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. We show that even were this the case, there remains a powerful argument for large-scale open market operations as a fiscal policy tool. As we also demonstrate, however, this same reasoning implies that open-market operations will be beneficial for stabilization as well, even when the economy is expected to remain mired in a liquidity trap for some time. Thus, the microeconomic fiscal benefits of open-market operations in a liquidity trap go hand in hand with standard macroeconomic objectives. Motivated by Japan?s recent economic experience, we use a dynamic general-equilibrium model to assess the welfare impact of open-market operations for an economy in Japan?s predicament. We argue that Japan can achieve a substantial welfare improvement through large open-market purchases of domestic government debt.

Keywords: Liquidity trap; Zero bound; Japan (search for similar items in EconPapers)
JEL-codes: E43 E52 E63 (search for similar items in EconPapers)
Date: 2004-06
References: Add references at CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
https://cepr.org/publications/DP4447 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: The Case for Open-Market Purchases in a Liquidity Trap (2012) Downloads
Working Paper: The Case for Open-Market Purchases in a Liquidity Trap (2012) Downloads
Working Paper: The Case for Open-Market Purchases in a Liquidity Trap (2012) Downloads
Working Paper: The Case for Open-Market Purchases in a Liquidity Trap (2012) Downloads
Journal Article: The Case for Open-Market Purchases in a Liquidity Trap (2005) Downloads
Working Paper: The Case for Open-Market Purchases in a Liquidity Trap (2004) Downloads
Working Paper: The Case for Open-Market Purchases in a Liquidity Trap (2004) Downloads
Working Paper: The Case for Open-Market Purchases in a Liquidity Trap (2004) Downloads
Journal Article: The case for open-market purchases in a liquidity trap (2003) Downloads
Working Paper: The Case for Open-Market Purchases in a Liquidity Trap (2003) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4447

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4447

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-23
Handle: RePEc:cpr:ceprdp:4447