Global Imbalances and Currency Wars at the ZLB

Ricardo Caballero (), Emmanuel Farhi and Pierre-Olivier Gourinchas

Working Paper from Harvard University OpenScholar

Abstract: This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets, and nominal rigidities. In this context, we establish six main results: (i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses; (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap--a phenomenon we dub the \reserve currency paradox;" (iii) Beggar-thy-neighbor exchange rate devaluations stimulate the domestic domestic economy at the expense of other economies; (iv) While more price and wage exibility exacerbates the risk of adeflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession; (v) (Safe) Public debt issuances and increases in government spending anywhere are expansionary everywhere, and more so when there is some degree of price or wage exibility. We use our model to shed light on the evolution of global imbalances,interest rates, and exchange rates since the beginning of the global financial crisis.

Date: 2016-01
New Economics Papers: this item is included in nep-mon and nep-opm
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Citations: View citations in EconPapers (24)

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Related works:
Working Paper: Global Imbalances and Currency Wars at the ZLB (2016)
Working Paper: Global Imbalances and Currency Wars at the ZLB (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:qsh:wpaper:344401

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