The Liquidity Trap and Japan

Pui Chi Ip ()

No 211, Research Papers from Macquarie University, Department of Economics

Abstract: Monetary policy may be effective in stabilising income via the real balance effect and the exchange rate channel. Even though interest rates of government bonds are subject to a zero lower bound, fiscal and monetary policy may be employed to change Tobin's q in a multi-asset model and thereby stimulate investment. Foreign exchange intervention, whether sterilised or non-sterilised, may have a positive impact on economic activity. Instead of emphasising inflation targeting, non-monetary policies should be adopted to stimulate aggregate demand to extricate Japan from the liquidity trap. Deflation is the consequence not the cause of the current recession.

Keywords: Liquidity trap; Tobin's q; Japan (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 F41 (search for similar items in EconPapers)
Pages: 21 pages.
Date: 2002-12
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