The Paradox of Global Thrift

Luca Fornaro and Federica Romei

American Economic Review, 2019, vol. 109, issue 11, 3745-79

Abstract: This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the economy. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In fact, prudential policies generate a rise in the global supply of savings and a drop in global aggregate demand. Weaker global aggregate demand depresses output in countries at the zero lower bound. Due to this effect, noncooperative financial and fiscal policies might lead to a fall in global output and welfare.

JEL-codes: E21 E23 E43 E44 E52 E62 F32 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20180608
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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: The paradox of global thrift (2018)
Working Paper: The Paradox of Global Thrift (2018)
Working Paper: The Paradox of Global Thrift (2018)
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