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- Publisher
- American Economic Association
- Copyright
- Copyright © 2013 by the American Economic Association
- Subject
- The Financial Crisis: Lessons for International Macroeconomics Conference, Paris, France, October 28–29, 2011
- ISSN
- 1945-7715
- eISSN
- 1945-7715
- DOI
- 10.1257/mac.5.3.190
- Publisher site
- See Article on Publisher Site
Abstract
Abstract This paper analyzes optimal policy responses to a global liquidity trap. The key feature of this environment is that relative prices respond perversely. A fall in demand in one country causes an appreciation of its terms of trade, exacerbating the initial shock. At the zero bound, this country cannot counter this shock. Then it may be optimal for the partner country to raise interest rates. The partner may set a positive policy interest rate, even though its “natural interest rate” is below zero. An optimal policy response requires a mutual interaction between monetary and fiscal policy. (JEL E12, E32, E44, E52, E62, F44, G01 )
Journal
American Economic Journal: Macroeconomics – American Economic Association
Published: Jul 1, 2013