Global Imbalances and Policy Wars at the Zero Lower Bound
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Accepted version
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881.43 KB
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Author(s)
Caballero, Ricardo J
Farhi, Emmanuel
Gourinchas, Pierre-Olivier
Date Issued
2021
Journal
Review of Economic Studies
Publisher
Oxford University Press (OUP)
Citation
Caballero, Ricardo J, Farhi, Emmanuel and Gourinchas, Pierre-Olivier. 2021. "Global Imbalances and Policy Wars at the Zero Lower Bound." Review of Economic Studies, 88 (6).
Version
Author's final manuscript
Abstract
Abstract
This article explores the consequences of extremely low real interest rates in a world with integrated but heterogeneous capital markets, nominal rigidities, and an effective lower bound [a zero lower bound (ZLB) for simplicity]. We establish four main results: (1) At the ZLB, creditor countries export their recession abroad, which we illustrate with a new Metzler diagram in quantities; (2) Beggar-thy-neighbour currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (3) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; and (4) When there is a scarcity of safe assets, net issuers of these assets import the recession from abroad.
This article explores the consequences of extremely low real interest rates in a world with integrated but heterogeneous capital markets, nominal rigidities, and an effective lower bound [a zero lower bound (ZLB) for simplicity]. We establish four main results: (1) At the ZLB, creditor countries export their recession abroad, which we illustrate with a new Metzler diagram in quantities; (2) Beggar-thy-neighbour currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (3) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; and (4) When there is a scarcity of safe assets, net issuers of these assets import the recession from abroad.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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DOI of Published Version
https://doi.org/10.1093/RESTUD/RDAB015
