Is Shutting Krugman's Liquidity Trap the Answer to Japan's Problems?

Dominic Wilson

Asia Pacific Economic Papers from Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University

Abstract: Paul Krugman has argued that the primary source of Japan’s current problems is that the economy faces a liquidity trap. According to Krugman, this has occurred because Japan confronts negative equilibrium real interest rates for a substantial period. To escape the trap, the Bank of Japan must generate inflationary expectations. This paper extends Krugman’s argument to consider the impact of demographic change on savings and investment and finds that Japan’s equilibrium real interest rate is unlikely to be negative for any considerable period. It argues instead that real forces, particularly productivity shocks and the problems of reallocating resources in their wake, are important contributors to Japan’s predicament. Consequently, simply generating inflation may not deliver sustained improvements in the macroeconomic situation. Successful reform, particularly to the banking sector, may be more important to a sustained recovery.

JEL-codes: E50 (search for similar items in EconPapers)
Pages: 34 pages
Date: 1999-11
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://crawford.anu.edu.au/pdf/pep/pep-297.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
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:csg:ajrcau:297

Access Statistics for this paper

More papers in Asia Pacific Economic Papers from Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University Contact information at EDIRC.
Bibliographic data for series maintained by Akira Kinefuchi ( this e-mail address is bad, please contact ).