Japanese economy has caught in a stagnation and deflation in almost a decade. Svensson (2003) summarizes that two factors which trigger Japan caught in a trap are policy mistakes and a failure to coordinate policies to recover Japanese economy.
There are some debatable arguments related to the Japanese policy to escape Japan from the liquidity trap. One of debates comes from Krugman that said Japanese economy has caught in a liquidity trap. He highlights the importance of a negative real rate of interest to equilibrate the economy, to match saving with investment in Japan.
This paper will outline Krugman's point of view on his article "Japan: still trapped", and give an opinion about his argument that a negative real rate of interest is necessary to restore full employment. This paper will also relate cagan's stability model to krugman analysis and point out the role of fiscal policy in … Read More