The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap

Abstract

this paper was presented at Bank of Japan's Ninth International Conference, "The Role of Monetary Policy under Low Inflation: Deflationary Shocks and Their Policy Responses," held in Tokyo, July 3--4, 2000. I thank my discussants, Glenn Stevens and Job Swank, and Claes Berg, Ben Bernanke, Peter Bofinger, Guy Debelle, Stefan Gerlach, Charles Goodhart, Koichi Hamada, Dale Henderson, Takatoshi Ito, Bennett McCallum, Allan Meltzer, Edward Nelson, Christian Pfister, Georg Rich, John Rogers, Shigenori Shiratsuka, Christopher Sims, Frank Smets, Peter Tinsley, Michael Woodford, and participants of the NBER Summer Institute for useful discussions and comments; Annika Andreasson and Christina Lnnblad for editorial and secretarial assistance; and the Department of Economics and the International Finance Section at Princeton University for its hospitality during my visit 1999--2000. I am solely responsible for expressed views and any errors. I. Introduction For several decades, h