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what happened in Japan. Fiscal stimulus works by pushing up inflation expectations because of the increase in government debt creates an incentive for the monetary authority to create inflation. As Gauti
Eggertsson addressed a few years ago if the monetary authority and the fiscal authority are not coordinated, the deficit spending multiplier goes from above 2, to precisely 0. There is no question that Japan's monetary authority continually ran contractionary policy (yes, policy can still be contractionary at 0 interest rates). Furthermore, it's clear that the Bank of Japan wouldn't respond to fiscal pressure in attempts to push up inflation expectations and so the deficit spending multiplier would be zero. Japan does not offer a refutation of the arguments put forth by Woodford, the Japan experience is consistent with Woodford's model.
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target, pushing up inflation expectations. You can depreciate your currency (at least if you are relatively small, open economy like Japan). You can do money-financed transfers. You can do quantitative easing and buy up long-term government bonds, corporate bonds, commercial paper, asset-backed securities etc. If you are struggling due to a commitment / time inconsistency problem you can utilize
Svensson's foolproof way to escape by developing a price-level target path, a devaluation of the currency, and a temporary exchange rate peg, which is later abandoned in favor of inflation-targeting once the price-level target has reached.
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Also, to the commentators above me. Paul
Krugman played an important role in the late 1990s in stimulating the discussion of how to escape a liquidity trap by committing to a higher inflation target. He didn't discover the liquidity trap (and he actually proved that the liquidity trap wasn't really a
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My sense was that
Krugman advocated a specific method for increasing the money supply. Since the central bank couldn't get commercial banks to lend even with interest rates at 0%, Krugman advocated that they expand the money supply by buying up forex with yen. This would increase the supply of yen in
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The usual gripe is that whoever put the "tone" tag did not put any reason on this page about why they took the action. So, let's ask for it. I would argue that the cons far outweigh the pros from a historic sense as stated (more or less) in the list albeit the phrasing may be improved a little. The
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Wrong. The New
Keynesian framework will tell you that the way fiscal stimulus was done in Japan would not work. The specific assumptions used in the paper by people like Eggertsson, Woodford, Christiano etc would imply Japan's fiscal stimulus would NOT be effective. Their framework predicts EXACTLY
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Yes, this has nothing to do with
Krugman, and the thesis that such economies are in a liquidity trap was noted by Keynes in 1936, and has been noted repeatedly since then. What to do when you've already lowered the interest rates as low as they can go, but it still seems like you should lower tham
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I don't know of any economist who believes that. There are a variety of ways for monetary policy to be effective at the ZIRP - because you can still effect expectations about future inflation. You can commit to zero interest rates beyond the period of deflationary pressure with a higher inflation
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fact is that we do not know the ultimate consequences of the current state (except, from my experiences of the deal, both from an economic sense and from that of an
American citizen, the effects stink), nor is there any clear way for the Fed to move having boxed itself into a corner.
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further (the "0% bound") is a topic that has come up numerous times in
Keynsian economics dating back to Keynes himself, with dozens of different analyses coming to different conclusions about what can be done and how effective doing it will be. --
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Since both
Switzerland and Portugal have imposed negative interest rates, I think this statement is inaccurate: "The ZIRP is an important milestone in monetary policy because the central bank is no longer able to reduce nominal interest rates"
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I don't know any economist that says you must use fiscal policy. Most fiscal stimulus supporters will admit they believe that monetary policy will be sufficient if done correctly. Fiscal policy can supplement, however.
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I'm not sure what the protocol is for something like this, but the merger makes sense to me. It also makes sense to keep the title of "Zero interest-rate policy" and just include a section for "zero lower bound
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All four of those methods are highly effective at escaping a liquidity trap. No economist I know of seriously believes the zero lower bound prevents monetary policy from doing anything.
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636:(how I characterize the thing) ought to have happened long ago. Now, we have all the world's central bankers mimicing the Washington crowd (what say you? rush to the lowest level?).
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That's why I have removed this section. As an economist it makes no sense and all of the points were subjective claims. If someone wants it back it needs citations.
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be merged into this article. Zero interest rate policy is what happens at the zero lower bound, so they are very closely related and should be discussed together.
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trap), but he explained how to escape it by targeting higher inflation (and his work was subsequently addressed in much fancier New
Keynesian DSGE models).
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Subsequent comments should be made on the appropriate discussion page. No further edits should be made to this discussion.
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articles on Knowledge. If you would like to participate, please visit the project page, where you can join
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Krugman does not deserve credit for this idea. I am astounded that he can be attributed with this.
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economists believe that monetary policy becomes ineffective under ZIRP ..."
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Well, if Krugman doesn't deserve the credit, then someone should edit the
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This article was the subject of an educational assignment supported by
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I'm going to change these problems assuming there are no objections.
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circulation, expand MS, and potentially generate some inflation.
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I agree, but what should be the merged article's name? --
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Zero interest-rate policy. That's my proposal, anyway.--
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The result of this discussion was to perform the merge.
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Subsequent comments should be made in a new section.
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