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 -