Global Liquidity Trap: A Simple Analytical Investigation

Ippei Fujiwara, Nao Sudo, and Yuki Teranishi (2009) - Global Liquidity Trap: A Simple Analytical Investigation, INSTITUTE FOR MONETARY AND ECONOMIC STUDIES (BANK OF JAPAN) Discussion Paper No. 2009-E-31

How should monetary policy cooperation be designed when more than one country simultaneously faces zero lower bounds on nominal interest rates? To answer this question, we examine monetary policy cooperation with both optimal discretion and commitment policies in a two-country model. We reach the following conclusions. Under discretion, monetary policy cooperation is characterized by the intertemporal elasticity of substitution (IES), a key parameter measuring international spillovers, and no history dependency. On the other hand, under commitment, monetary policy features history dependence with international spillover effects.