The International Transmission of Asset Market Shocks in Liquidity Traps

Philippe Bacchetta, Kenza Benhima, Yannick Kalantzis and Maxime Phillot

Working papers from Banque de France

Abstract: We build a two-country heterogenous-agent non-Ricardian model featuring asset scarcity and financial frictions in international capital markets. Due to the non-Ricardian nature of our framework, a demand for liquidity emerges and the supply of bonds matters. We show that shocks affecting the supply or demand of assets have very different international spillovers for an economy in a liquidity trap. A decrease in the supply of assets issued abroad leads to an asset shortage domestically. In normal times, the nominal interest rate decreases, stimulating investment and output. In a liquidity trap, deflation hits instead and the currency appreciates, which may cause a recession.

Keywords: International Spillovers; Zero Lower Bound; Liquidity Trap; Asset Scarcity (search for similar items in EconPapers)
JEL-codes: E22 E40 F32 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2026
New Economics Papers: this item is included in nep-dge, nep-ifn, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:1032

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