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

Lars Svensson

No 687, Seminar Papers from Stockholm University, Institute for International Economic Studies

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 an exchange-rate peg, which is later abandoned in favor of price-level or inflation targeting when the price-level target is reached. This will jump-start the economy 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 shift to price-level or inflation targeting will avoid the risk of overheating. Some conclusions for Japan are also included.

Keywords: Deflation; liquidity trap; nominal interest rates. (search for similar items in EconPapers)
JEL-codes: E52 F31 F33 F41 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2000-08-03
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (50)

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Related works:
Journal Article: The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap (2001)
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:hhs:iiessp:0687

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