Global Liquidity Trap

Ippei Fujiwara, Tomoyuki Nakajima, Nao Sudo and Yuki Teranishi

No 10-E-11, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: In this paper we consider a two-country New Open Economy Macroeconomics model, and analyze the optimal monetary policy when countries cooperate in the face of a "global liquidity trap" -- i.e., a situation where the two countries are simultaneously caught in liquidity traps. The notable features of the optimal policy in the face of a global liquidity trap are history dependence and international dependence. The optimality of history dependent policy is confirmed as in local liquidity trap. A new feature of monetary policy in global liquidity trap is whether or not a country's nominal interest rate is hitting the zero bound affects the target inflation rate of the other country. The direction of the effect depends on whether goods produced in the two countries are Edgeworth complements or substitutes. We also compare several classes of simple interest-rate rules. Our finding is that targeting the price level yields higher welfare than targeting the inflation rate, and that it is desirable to let the policy rate of each country respond not only to its own price level and output gap, but also to those in the other country.

Keywords: Zero Interest Rate Policy; Two-country Model; International Spillover; Monetary Policy Coordination (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Global liquidity trap (2013)
Working Paper: Global liquidity trap (2013)
Working Paper: Global Liquidity Trap (2011)
Working Paper: Global Liquidity Trap (2011)
Working Paper: Global liquidity trap (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:10-e-11

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