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Liquidity Trap (liquidity + trap)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	100%

Selected Abstracts

THE LIQUIDITY TRAP AND PERSISTENT UNEMPLOYMENT WITH DYNAMIC OPTIMIZING AGENTS: EMPIRICAL EVIDENCE

THE JAPANESE ECONOMIC REVIEW, Issue 4 2004
YOSHIYASU ONO
Standard money-in-utility dynamic models assume satiable liquidity preference, and thereby prove the existence of a full-employment steady state. In the same framework, it is known that under insatiable liquidity or wealth preference there is a case where a full-employment steady state does not exist. A liquidity trap then arises and unemployment persists in the steady state. Using both parametric and non-parametric methods, this paper empirically finds that insatiable liquidity/wealth preference is better supported. Thus, without assuming any permanent distortion, we can analyse an effective demand shortage in a dynamic optimization framework. [source]

Structural Traps, Politics and Monetary Policy

INTERNATIONAL FINANCE, Issue 1 2004
Robert H. Dugger
Structural conditions pose a challenge to monetary policy, as the example of Japan shows. In this paper we develop the concept of structural trap, where the interplay of long-term economic development incentives, politics, and demographics results in economies being unable to efficiently reallocate capital from low- to high-return uses. The resulting macroeconomic picture looks like a liquidity trap , low GDP growth and deflation despite extreme monetary easing. But the optimal policy responses are very different and mistaking them could lead to perverse results. The key difference between a liquidity trap and a structural one is the role of politics. We show how, in the Japanese case, longstanding economic incentives and protections and demographic trends have resulted in a political leadership that resists capital reallocation from older protected low-return sectors to higher-return newer ones. If the Japanese case is instructive, in a structural trap, extremely loose monetary policy perpetuates deflation and low GDP growth, because unproductive but politically important firms are allowed to survive and capital reallocation is prevented. By preventing the needed reduction in excess capacity, a structural trap condemns reflationary policies to failure by making the creation of credible inflation expectations impossible. Faced with a structural trap, an independent central bank with a price stability mandate should adopt a monetary policy stance consistent with restructuring. If political resistance is high, monetary policy decision makers will need to keep nominal rates high enough to ensure that capital reallocation takes place at an acceptable pace. [source]

Monetary Policy and the Lost Decade: Lessons from Japan

JOURNAL OF MONEY, CREDIT AND BANKING, Issue 5 2010
DANIEL LEIGH
liquidity trap; deflation; monetary policy; Bayesian econometrics I investigate how monetary policy can avoid a deflationary slump when policy rates are near zero by studying interest rate policy during Japan's "Lost Decade." Estimation results suggest that the Bank of Japan's interest rate policy fits a conventional reaction function with an inflation target near 1%. The disapointing economic performance thus seems primarily due to adverse economic shocks rather than extraordinary policy errors. Also, counterfactual policy simulations suggest that simply raising the inflation target would not have substantially improved performance. However, price-level targeting or combining a higher inflation target with an aggressive output response would have achieved superior stabilization results. [source]