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Working Paper No. 298 | March 2000

Krugman on the Liquidity Trap

Why Inflation Won't Bring Recovery In Japan

Paul Krugman has argued that Japan is in a liquidity trap and that it can recover only if the central bank there follows a policy of "credible inflation." This paper argues that Krugman's proposal, which is similar to what Fisher proposed during the Depression, is based on a different interpretation of the liquidity trap from that proposed by Keynes. As a result, his policy recommendations can result in neither the elimination of the trap nor in Japan's economic recovery.

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Author(s):
Jan Kregel

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