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2015•RePEc: Research Papers in EconomicsOpen access

Understanding Benign Liquidity Traps: The Case of Japan

Stefan Homburg

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Abstract

Abstract: Japan has been in a benign liquidity trap since 1990. In a benign liquidity trap, interest rates approach ze-ro, prices decline, and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper intro-duces a monetary general equilibrium model that is com-patible with Japan’s performance and resolves puzzles asso-ciated with liquidity traps. Possible conclusions for Anglo-Saxon countries and eurozone members are also discussed.

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Abstract: Japan has been in a benign liquidity trap since 1990. In a benign liquidity trap, interest rates approach ze-ro, prices decline, and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper intro-duces a monetary general equilibrium model that is com-patible with Japan’s performance and resolves puzzles asso-ciated with liquidity traps. Possible conclusions for Anglo-Saxon countries and eurozone members are also discussed.

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Available abstract

Abstract: Japan has been in a benign liquidity trap since 1990. In a benign liquidity trap, interest rates approach ze-ro, prices decline, and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper intro-duces a monetary general equilibrium model that is com-patible with Japan’s performance and resolves puzzles asso-ciated with liquidity traps. Possible conclusions for Anglo-Saxon countries and eurozone members are also discussed.

Key concepts: Liquidity trap, Market liquidity, Trap (plumbing), Economics, Monetary economics, Zero lower bound, Liquidity crisis, Macro

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