Macroeconomic Stabilization Through an Employer of Last Resort

2005 ◽  
Author(s):  
Scott T. Fullwiler
Keyword(s):  
Macroeconomic Stabilization ◽  
Employer Of Last Resort

scholarly journals The Case for Open-Market Purchases in a Liquidity Trap

2005 ◽  
Vol 95 (1) ◽  
pp. 110-137 ◽  
Author(s):  
Alan J Auerbach ◽  
Maurice Obstfeld
Keyword(s):  
Interest Rate ◽  
Large Scale ◽  
Open Market ◽  
Macroeconomic Stabilization ◽  
Short Term ◽  
Liquidity Trap ◽  
Welfare Impact ◽  
Dynamic General Equilibrium Model ◽  
Policy Tool ◽  
Economic Experience

Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. We show that even were this the case, there remains a powerful argument for large-scale open market operations as a fiscal policy tool. As we also demonstrate, however, this same reasoning implies that open-market operations will be beneficial for stabilization as well, even when the economy is expected to remain mired in a liquidity trap for some time. Thus, the microeconomic fiscal benefits of open-market operations in a liquidity trap go hand in hand with standard macroeconomic objectives. Motivated by Japan’s recent economic experience, we use a dynamic general-equilibrium model to assess the welfare impact of open-market operations for an economy in Japan’s predicament. We argue Japan can achieve a substantial welfare improvement through large open-market purchases of domestic government debt.

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