US in Liquidity Trap – What are the Options?

THis is the title of a new paper I have written. In this I summarise the debates going in US over economic outlook and various policy options.

My reading (little bit though) of Japan in 1990s and US now is in a liquidity trap situation (when central bank policy rate is zero/near zero), a central bank has many options. However, there are two issues. One, their effectiveness is limited. Two, some measures are not practice and cannot be adopted. And when one adds numerous economists’ arguments over benefits and negatives of each option, it is all chaos. Then political situation always plays a major role. With a dip in taxes and surge in expenditure the, government is on shaky grounds. They might want to stimulate but concerns of budget deficit/fiscal multiplier always muddles the whole thinking. Hence, it may not be a liquidity trap but surely a policy trap.

Let me know your comments.

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One Response to “US in Liquidity Trap – What are the Options?”

  1. Anthony Says:

    I thought your paper was a very good summary and comparison of the problems in Japan and the US. I learned a lot. Thanks.

    If I’m reading this right, the fiscal stimulus in the US was not a test of Keynesian theory because it was really too small. However, the Fed’s coming actions next week will be a test of the monetarists philosophy that there is no liquidity trap, and that they can improve the economy with unconventional monetary policies. It will be interesting to see if they can increase inflation expectations.

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