Liquidity Traps in a World Economy

Robert Kollmann ()

No 15631, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Zero lower bound; Expectations-driven and fundamentals-driven liquidity traps; Domestic and international shock transmission; Terms of trade; exchange rate; Net exports (search for similar items in EconPapers)
JEL-codes: E3 E4 F2 F3 F4 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Liquidity traps in a world economy (2021)
Working Paper: Liquidity Traps in a World Economy (2021)
Working Paper: Liquidity traps in a world economy (2021)
Working Paper: Liquidity Traps in a World Economy (2021)
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