Quantitative easing in an open economy—Not a liquidity but a reserve trap

Anthony F. Herbst, Joseph S.K. Wu and Chi Pui Ho

Global Finance Journal, 2014, vol. 25, issue 1, 1-16

Abstract: Expansionary monetary policy is ineffective in a liquidity trap. In another case, which we call a “reserve trap,” money supply increase is trapped in bank reserves; there is no credit expansion through the banking system. In such case, quantitative easing (QE) will not boost credit to the real sector and revitalize the economy. To analyze a reserve trap, we modify the open economy model to include multiple interest rates. Trade is included since exports can be financed externally even during domestic credit constriction. We show the conditions under which QE can lead to currency depreciation and trigger an export-led recovery.

Keywords: Quantitative easing; Credit expansion; Macroeconomics; Export-led (search for similar items in EconPapers)
JEL-codes: E58 F41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:25:y:2014:i:1:p:1-16

DOI: 10.1016/j.gfj.2014.03.004

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