The effects of foreign shocks when interest rates are at zero

Martin Bodenstein, Christopher Erceg and Luca Guerrieri

Canadian Journal of Economics, 2017, vol. 50, issue 3, 660-684

Abstract: In a two-country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound on policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. Departing from many of the existing closed-economy models, the duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the trap, implying more contractionary effects for the home country. The home economy is more vulnerable to adverse foreign shocks if the neutral rate is lowconsistent with secular stagnationand trade openness is high.

JEL-codes: F32 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: The Effects of Foreign Shocks When Interest Rates Are at Zero (2010)
Working Paper: The Effects of Foreign Shocks when Interest Rates are at Zero (2009)
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