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The International Transmission of Asset Market Shocks in Liquidity Traps

Author

Listed:
  • Bacchetta, Philippe
  • Benhima, Kenza
  • Kalantzis, Yannick
  • Phillot, Maxime

Abstract

We build a two-country heterogenous-agent non-Ricardian model featuring asset scarcity and financial frictions in international capital markets. Due to the non-Ricardian nature of our framework, a demand for liquidity emerges and the supply of bonds matters. We show that shocks affecting the supply or demand of assets have very different international spillovers for an economy in a liquidity trap. A decrease in the supply of assets issued abroad leads to an asset shortage domestically. In normal times, the nominal interest rate decreases, stimulating investment and output. In a liquidity trap, deflation hits instead and the currency appreciates, causing a recession.

Suggested Citation

  • Bacchetta, Philippe & Benhima, Kenza & Kalantzis, Yannick & Phillot, Maxime, 2024. "The International Transmission of Asset Market Shocks in Liquidity Traps," CEPR Discussion Papers 18904, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18904
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    More about this item

    Keywords

    Zero lower bound; Liquidity trap; Asset scarcity;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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