Krugman.

• Position: Brief Article

Krugman shows that the liquidity trap is not an artifact of the IS-LM model's incompleteness: even in a "modern" macroeconomic model based on intertemporal utility maximization by a representative agent, the liquidity trap can arise. Krugman argues that fiscal expansion or unconventional monetary policy would be sufficient to overcome the liquidity trap if it is only temporary. But if the liquidity trap is structural, as he believes to be the case for Japan, then inflation targeting aimed at changing expectations may be the only effective policy.

Like Krugman, Itoh and Shimoi suggest that Japan is in a liquidity trap. They describe "adjustment inflation policy" (chosei...