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Global vs. Local Liquidity Traps
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- Authors
- Issue Date
- 2011-10
- Citation
- Seoul Journal of Economics, Vol.24 No.4, pp. 471-493
- Keywords
- Liquidity trap ; Monetary policy ; Fiscal policy ; International spillovers
- Abstract
- This paper examines demand spillovers in a two country open economy
model to a demand shock newline (emanating from a single,
source country) sufficiently large to push one or both countries into
a liquidity trap. The zero lower bound on nominal interest rates
keeps the central bank in the source country from fully adjusting
monetary policy. We describe a two country New Keynesian model
with sufficient home bias so as to exclude symmetric movements in
response to demand shocks. We study conditions under which a
liquidity trap in one country might spillover to a trading partner. We
study, under which conditions, a liquidity trap in one country will
lead to a liquidity trap in another country. We also show conditions
under which a liquidity trap in another country can spillover into an
output expansion in a trading partner.
- ISSN
- 1225-0279
- Language
- English
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