TY  - JOUR
AU  - Svensson,Lars E.O.
TI  - Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10195
PY  - 2003
Y2  - December 2003
UR  - http://www.nber.org/papers/w10195
L1  - http://www.nber.org/papers/w10195.pdf
N1  - Author contact info:
Lars E.O. Svensson
Sveriges Riksbank
SE-103 37 Stockholm
Sweden
Tel: +46 8 787 0107
Fax: +46 8 21 0531
E-Mail: svensson@princeton.edu
M1  - published as Svensson, Lars O. "Escaping From A Liquidity Trap And Deflation: The Foolproof Way And Others," Journal of Economic Perspectives, 2003, v17(4,fall), 145-166.
AB  - Existing proposals to escape from a liquidity trap and deflation, including my  Foolproof Way,' are discussed in the light of the optimal way to escape. The optimal way involves three elements: (1) an explicit central-bank commitment to a higher future price level; (2) a concrete action that demonstrates the central bank's commitment, induces expectations of a higher future price level and jump-starts the economy; and (3) an exit strategy that specifies when and how to get back to normal. A currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations. Furthermore, an intentional currency depreciation and a crawling peg, as in the Foolproof Way, can implement the optimal way and, in particular, induce the desired expectations of a higher future price level. I conclude that the Foolproof Way is likely to work well for Japan, which is in a liquidity trap now, as well as for the euro area and the United States, in case either would fall into a liquidity trap in the future.
ER  -