Finland paper investigates how to escape liquidity traps


A discussion paper, published by the Bank of Finland on October 9, questions whether fiscal stimulus or austerity is best suited to preventing liquidity traps in an environment where interest rates are at their lower bound.

The authors, Jess Benhabib, George W Evans and Seppo Honkapohja, say policies of temporary fiscal stimulus, and in some cases fiscal austerity, are both capable of eliminating liquidity traps, but require careful "fine tuning" in terms of the magnitude, direction and duration

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