Liquidity Traps, Prudential Policies, and International Spillovers

Javier Bianchi and Louphou Coulibaly

No 30038, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate optimal monetary and macroprudential policies in an open economy with aggregate demand externalities and an occasionally binding zero lower bound constraint. Our analysis highlights that the optimal policy balances output stabilization and capital flow management. When macroprudential policy is available, monetary policy stabilizes the output gap. By contrast, when macroprudential policy is not available, monetary policy is used prudentially. However, contrary to a widespread view, raising the interest rate is not necessarily the optimal prudential policy. Finally, we show that international spillovers operate through the world real rate, but macroprudential policies provide insulation from the adverse effects of foreign policies.

JEL-codes: E21 E23 E43 E44 E52 E62 F32 (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-ifn, nep-mac, nep-mon and nep-opm
Note: IFM ME
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Working Paper: Liquidity Traps, Prudential Policies, and International Spillovers (2021)
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