Thursday, September 19, 2013

Japan, interest rates and the liquidity trap

As promised, here is the version of the figure from the link with data from Japan. Following that diagram, the level curves of the interest rate surface (constant interest rate) are plotted in red and the information trap criterion is plotted as a dashed black curve. The modeled path of the Japanese economy in the space is plotted in dark blue with a few years indicated:

Interestingly, Japan seems to have stumbled into the information/liquidity trap in the 1990s because rates were low and the liquidity trap rate was (relatively) high. The liquidity trap rate reached 1%, whereas the US pushed itself over the dashed line and rates below 1% with quantitative easing while the liquidity trap rate was of order 0.1%.

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