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future inflation than would labour markets to an
announcement of impending deflation, but sluggishness in reactions by households and companies is still by far the most likely response to
In other words, such threats have to be followed by
deeds and the money supply must be expanded in
order to generate the announced inflation. Yet, in
Japan today, this may not be easy. As Krugman
himself points out:
If an economy is truly in a liquidity trap, failure of broad
monetary aggregates to expand is not a sign of insufficiently expansionary monetary policy; the central bank
may simply be unable to achieve such an expansion
because additional base [money] is either added to bank
reserves or held by the public in place of bank deposits.
(Krugman, 1998, p. 158) If this is the case, generating the needed increase in
inflationary expectations may require the use of
unconventional policy measures (such as buying
land or foreign currency) which would be even
harder for central bankers to accept.
And even if, through monetary expansion, credible
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This note was uploaded on 02/03/2014 for the course ECON 204 taught by Professor Devero during the Summer '13 term at American University of Sharjah.
- Summer '13