Discussion Paper Series 2009-E-31

Global Liquidity Trap: A Simple Analytical Investigation

Ippei Fujiwara, Nao Sudo, Yuki Teranishi

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.

Keywords: Optimal Monetary Policy Cooperation; Zero Lower Bound

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2009 Bank of Japan All Rights Reserved.

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