University of Leicester
Browse
1/1
2 files

Strategic monetary and fiscal policy interaction in a liquidity trap

chapter
posted on 2018-09-26, 13:58 authored by Ali al-Nowaihi, Sanjit Dhami
In its classical form, the liquidity trap, a term coined by Keynes (1936), is a situation where an increase in money supply fails to reduce the nominal interest rate. The modern literature has concentrated on the case where the nominal interest rate has been driven down to zero (the so called ‘zero bound’). The source of a liquidity trap, in most circumstances, is a sharp fall in aggregate demand; see Keynes (1936), Bernanke (2002). Interest in the liquidity trap has revived in recent years due, in no small measure, to the experience of Japan since 1990. Woodford (2005, 29) discusses the near miss of the US economy from a liquidity trap in the summer of 2003. The era of successful delegation of monetary policy to independent central banks with low inflation targets1 opens up the possibility that sufficiently large negative demand shocks might push an economy into a liquidity trap with huge associated welfare consequences.2 Blanchard et al. (2010) propose an inflation target of 4 percent in order to provide greater range for the nominal interest rate instrument. Our paper provides one framework within which to evaluate this proposal.

History

Citation

al-Nowaihi, A;Dhami, S, Strategic monetary and fiscal policy interaction in a liquidity trap, 'The Handbook of Post Crisis Modelling', 2016, Palgrave Macmillan

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Business/Economics - Pre December 2017

Version

  • AM (Accepted Manuscript)

Published in

al-Nowaihi

Publisher

Palgrave Macmillan

isbn

978-1-349-57578-7;978-1-137-49449-8

Copyright date

2016

Available date

2018-09-26

Publisher version

https://link.springer.com/chapter/10.1007/978-1-137-49449-8_4

Language

en

Usage metrics

    University of Leicester Publications

    Categories

    Exports

    RefWorks
    BibTeX
    Ref. manager
    Endnote
    DataCite
    NLM
    DC