The Paradox of Global Thrift (Plus Appendix)

Federica Romei and Luca Fornaro

No 1039, Working Papers from Barcelona School of Economics

Abstract: This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the economy. We show that these policies, while effective from the perspective of individual countries, might back re if applied on a global scale. In fact, prudential policies generate a rise in the global supply of savings and a drop in global aggregate demand. Weaker global aggregate demand depresses output in countries at the zero lower bound. Due to this effect, non-cooperative financial and fiscal policies might lead to a fall in global output and welfare.

Keywords: E32; E44; E52; F41; F42 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-ifn, nep-mac, nep-opm and nep-pke
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1039

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