Ricardo Lago and I have just finished "The Liquidity Trap in an Open
Economy".

The paper analyses how a small open economy with a floating exchange
rate, perfect international mobility of financial capital and sluggish
price level and inflation adjustment can hit the zero lower bound for
the nominal rate of interest on non-monetary securities and get stuck in
a liquidity trap. One sure way of avoiding the zero lower bound and the
liquidity trap is the payment of negative nominal interest on currency
or ‘taxing money’. The generalized shoe leather costs of taxing money
have to be balanced against the cost of orbiting the liquidity trap
steady state and suffering periodic inflation and disinflation.

For a pdf version of the paper, click
http://www.nber.org/~wbuiter/openliq.pdf
For the Figures click http://www.nber.org/~wbuiter/openpic.pdf

Willem H. Buiter

European Bank for Reconstruction and Development

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