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Liquidity Traps in a World Economy

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  • Kollmann, Robert

Abstract

This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These “expectations-driven†liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a “fundamentals-driven†liquidity trap.

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  • Kollmann, Robert, 2021. "Liquidity Traps in a World Economy," CEPR Discussion Papers 15631, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15631
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    Cited by:

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    3. Javier Bianchi & Louphou Coulibaly, 2021. "Liquidity Traps, Prudential Policies, and International Spillovers," Working Papers 780, Federal Reserve Bank of Minneapolis.

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    More about this item

    Keywords

    Zero lower bound; Expectations-driven and fundamentals-driven liquidity traps; Domestic and international shock transmission; Terms of trade; exchange rate; Net exports;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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