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Krugman on Japan's Liquidity Trap

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  • Colin Rogers

    (School of Economics, University of Adelaide)

Abstract

The theoretical analysis of Japan's liquidity trap is developed by Krugman (1998a,b,c; 1999) in terms of both an ''intertemporal maximization'' framework and an ''absolutely conventional open economy IS-LM model''. In this note I examine the latter version of the story and argue that Krugman's analysis is obscured by reliance on the Fisher parity relationship. The distinction between the cost of capital and the return on capital is introduced to make sense of Krugman's analysis.

Suggested Citation

  • Colin Rogers, 2001. "Krugman on Japan's Liquidity Trap," School of Economics and Public Policy Working Papers 2001-01, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2001-01
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2001-01.pdf
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