In other words such threats have to be followed by

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Unformatted text preview: t of 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 policy threats. 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 infl...
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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.

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