TY  - JOUR
AU  - Svensson,Lars E.O.
TI  - The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7957
PY  - 2000
Y2  - October 2000
UR  - http://www.nber.org/papers/w7957
L1  - http://www.nber.org/papers/w7957.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: lars.svensson@iies.su.se
AB  - 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. This will jump-start the economy and escape deflation by a real depreciation of the domestic currency, a lower long real interest rate, and increased inflation expectations. The abandonment of the exchange-rate peg and the shift to price-level or inflation targeting will avoid the risk of overheating. Some conclusions for Japan are included.
ER  -