The Zero Bound in an Open Economy: A Foolproof Way of Escaping From a Liquidity Trap

Topics:
Deflation
Tags:
Currency & Foreign Exchange,
Exchange Rate,
Finance,
Free Trade,
Inflation,
Investment,
Liquidity,
National Bureau Of Economic Research
Source:
National Bureau of Economic Research

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Overview: The paper examines the transmission mechanism of monetary policy in an open economy with and without a binding zero bound on nominal interest rates. In particular, a foolproof way of escaping from a liquidity trap is presented, consisting of a price-level target path, a devaluation of the currency and a temporary exchange rate peg, which is later abandoned in favor of price-level or inflation targeting when the price-level target has been reached. The abandonment of the exchange-rate peg and the shift to price-level or inflation targeting will avoid the risk of overheating.

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Format: PDF | Size: 381KB | Date: Oct 2000 | Pages: 47

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