Global Liquidity Traps

Robert Kollmann ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies fluctuations of interest rates, inflation and output in a two-country New Keynesian business cycle model with a zero lower bound (ZLB) constraint for nominal interest rates. The presence of the ZLB generates multiple equilibria driven by self-fulfilling changes in domestic and foreign inflation expectation. Each country randomly switches in and out of a liquidity trap. In a floating exchange rate regime, liquidity traps can either be synchronized or unsynchronized across countries. This is the case even if countries are perfectly financially integrated. By contrast, in a monetary union, self-fulfilling fluctuations in inflation expectations must be perfectly correlated across countries.

Keywords: Zero lower bound; liquidity trap; global business cycles (search for similar items in EconPapers)
JEL-codes: E3 E4 F2 F3 F4 (search for similar items in EconPapers)
Date: 2020-04-15
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:102324

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