Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap

David Cook () and Michael Devereux

American Economic Journal: Macroeconomics, 2013, vol. 5, issue 3, 190-228

Abstract: This paper analyzes optimal policy responses to a global liquidity trap. The key feature of this environment is that relative prices respond perversely. A fall in demand in one country causes an appreciation of its terms of trade, exacerbating the initial shock. At the zero bound, this country cannot counter this shock. Then it may be optimal for the partner country to raise interest rates. The partner may set a positive policy interest rate, even though its “natural interest rate” is below zero. An optimal policy response requires a mutual interaction between monetary and fiscal policy.

JEL-codes: E12 E32 E44 E52 E62 F44 G01 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/mac.5.3.190
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Citations: View citations in EconPapers (68)

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Related works:
Working Paper: Sharing the burden: monetary and fiscal responses to a world liquidity trap (2011)
Working Paper: Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap (2011)
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