Helicopter Drops and Japan's Liquidity TrapLaurence Ball This paper examines the effects of a money-financed fiscal expansion-a helicopter drop-when an economy is in a liquidity trap. It uses a textbook-style model calibrated to fit Japan's economic slump and deflation as of 2003. According to the results, money-financed transfers totaling 9.4 percent of GDP end the output slump and guide the economy to a steady state with 2 percent inflation. By raising output and inflation, the policy also reduces the ratio of government debt to GDP. The policy's long-run effects are the same as those of a bond-financed fiscal expansion, but money finance prevents a short-run rise in debt. Key words: Helicopter drop; Liquidity trap; Deflation Views expressed in Monetary and Economic Studies are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies. Copyright
|
2008 Bank of Japan All Rights Reserved.
