How should monetary policy respond to a “global liquidity trap,” where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterize optimal monetary policy, and show that the optimal rate of inflation in one...

We show that the spread-adjusted Taylor rule including a response to the credit spread is a theoretically optimal monetary policy under heterogeneous loan contracts. However, the optimal response to the credit spread is ambiguous, given the financial market structure.