TY  - JOUR
AU  - Auerbach, Alan
AU  - Obstfeld, Maurice
TI  - Monetary and Fiscal Remedies for Deflation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10290
PY  - 2004
Y2  - February 2004
DO  - 10.3386/w10290
UR  - http://www.nber.org/papers/w10290
L1  - http://www.nber.org/papers/w10290.pdf
N1  - Author contact info:
Alan J. Auerbach
Department of Economics
530 Evans Hall, #3880
University of California, Berkeley
Berkeley, CA 94720-3880
Tel: 510/643-0711
Fax: 510/643-0413
E-Mail: auerbach@econ.berkeley.edu

Maurice Obstfeld
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-9646
E-Mail: obstfeld@econ.berkeley.edu
AB  - Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. In an earlier paper, we showed that this reasoning does not hold, that open-market operations can provide substantial macroeconomic benefits and facilitate the use of powerful fiscal policy tools even in a liquidity trap. In this paper, we consider an alternative approach that has been suggested for use in a liquidity trap, a scheduled increase in consumption tax rates. We find that such a policy could, indeed, increase short-run consumption, but would be less effective at increasing welfare or accelerating a country's exit from a liquidity trap. Though a variant of this tax policy might induce exit from a liquidity trap, the impact of welfare is negative in this case as well. We also argue that this alternative tax-rate-based approach is subject to more severe credibility problems than the monetary policy approach explored in our original paper.
ER  -