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Liquidity traps in a world economy

Robert Kollmann ()

Journal of Economic Dynamics and Control, 2021, vol. 132, issue C

Abstract: This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These “expectations-driven” liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a “fundamentals-driven” liquidity trap.

Keywords: Zero lower bound; Expectations-driven and fundamentals-driven liquidity traps; Domestic and international shock transmission; Terms of trade; Exchange rate; Net exports (search for similar items in EconPapers)
JEL-codes: E3 E4 F2 F3 F4 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Liquidity Traps in a World Economy (2021) Downloads
Working Paper: Liquidity Traps in a World Economy (2021) Downloads
Working Paper: Liquidity traps in a world economy (2021) Downloads
Working Paper: Liquidity Traps in a World Economy (2021) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:132:y:2021:i:c:s016518892100141x

DOI: 10.1016/j.jedc.2021.104206

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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