Japan, the Foolproof Way, and liquidity traps

“Monetary Policy and Financial Markets at the Effective Lower Bound,” Journal of Money, Credit and Banking, forthcoming. Revision, June 2010, of speech at the conference  Financial Markets and Monetary Policy, Federal Reserve Board, June 4-5, 2009. PDF.Abstract.

“Monetary Policy at the ZLB in the Current Crisis,” panel presentation at the conference on Quantitative Approaches to Monetary Policy in Open Economies, Federal Reserve Bank of Atlanta, May 15-16, 2009. PDF.

Interview on SR International-Radio Sweden, February 18, 2009. Listen.

“Monetary Policy with a Zero Interest Rate,” speech at SNS, Stockholm, February 17, 2009. PDF.
The line: Central banks have powerful policy options with a zero interest rate and can still stabilize inflation and the real economy.

“Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank” (with Olivier Jeanne, IMF), American Economic Review 97 (2007) 474-490, PDFAbstract.
The line: A central bank’s realistic concern about its capital provides a commitment mechanism that can solve the time-consistency problem associated with the optimal escape from a liquidity trap.

“Monetary Policy and Japan’s Liquidity Trap,” January 2006, prepared for the ESRI International Conference on Policy Options for Sustainable Economic Growth in Japan, Cabinet Office, Tokyo, September 14, 2005, PDFAbstract.
The line: Monetary policy in Japan has focused on reducing expectations of future interest rates, but a more effective policy in a liquidity trap is to increase expectations of the future price level. The Foolproof Way is likely to be the most effective policy to do this.

“Comments on Bernanke, Reinhart, and Sack, ‘An Empirical Assessment of Monetary Policy Alternatives at the Zero Bound’,” presented at the Brookings Panel on Economic Activity, Washington, DC, September 9-10, 2004, revised November 2004, PDFAbstract.
The line: The Bernanke-Reinhart-Sack paper mostly focuses on alternative policies in a liquidity trap to affect expectations of future interest rates. But the problem in a liquidity trap is rather to raise private-sector expectations of the future price level.

“Challenges for Monetary Policy,” presented at the meeting of the Bellagio Group of the G10, held at the National Bank of Belgium, Brussels, January 26-27, 2004, PDF (98 KB).

“The Magic of the Exchange Rate: Optimal Escape from a Liquidity Trap in Small and Large Open Economies,” Version 1.2, July 2004, PDFAbstract.

“Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others,” Journal of Economic Perspectives  17(4) (Fall 2003) 145-166. PDF (191 KB). Abstract.

Discussion of Alan J. Auerbach and Maurice Obstfeld, “The Case for Open-Market Purchases in a Liquidity Trap,” FRBSF and SIEPR Conference on Finance and Macroeconomics, San Francisco, Feb 28-Mar 1, 2003, overhead slides (117 KB).

“Escaping from Deflation and a Liquidity Trap,” talk at the Hong Kong Institute for Monetary Research, Hong Kong Monetary Authority, Dec 17, 2002, overhead slides (71 KB).

“Monetary Policy and Real Stabilization,” September 2002, in Rethinking Stabilization Policy, A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 29-31, 2002, 261-312, PDFAbstract. (Chapt. 4, “The Zero Bound, a Liquidity Trap and Deflation,” contains a discussion of the foolproof way.)

How Japan Can Recover,” Personal View, Financial Times, Sep 25, 2001. (A simplified version of the non-technical summary of the Graham Lecture below.)

“The Foolproof Way of Escaping from a Liquidity Trap: Is It Really, and Can It Help Japan?” The Frank D. Graham Memorial Lecture, Princeton University, April 5, 2001. Non-technical summary | Overhead slides (PDF, 79 KB)

“The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap,” Monetary and Economic Studies 19(S-1), February 2001, 277-312, PDF (185 KB). Abstract. (This is the detailed academic version of the Foolproof Way.)

Discussion of McCallum, “Inflation Targeting and the Liquidity Trap,” FRBSF and SIEPR Conference on Asset Prices, Exchange Rates and Monetary Policy, Stanford University, March 2-3, 2001, overhead slides (PDF, 58KB).