Step away from the zero lower bound: Small open economies in a world of secular stagnation
Giancarlo Corsetti,
Eleonora Mavroeidi,
Gregory Thwaites and
Martin Wolf
Journal of International Economics, 2019, vol. 116, issue C, 88-102
Abstract:
We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape has a beggar-thy-self effect, that may end up lowering welfare while eliminating underemployment. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities' ability to rescue the economy from stagnation.
Keywords: Monetary policy; Deflation; Depreciation; Beggar thy neighbor; Capital controls (search for similar items in EconPapers)
JEL-codes: E62 F41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S002219961830254X
Full text for ScienceDirect subscribers only
Related works:
Working Paper: Step away from the zero lower bound: small open economies in a world of secular stagnation (2017) 
Working Paper: Step away from the zero lower bound: Small open economies in a world of secular stagnation (2017) 
Working Paper: Step away from the zero lower bound: small open economies in a world of secular stagnation (2017) 
Working Paper: Step away from the zero lower bound: Small open economies in a world of secular stagnation (2017) 
Working Paper: Step away from the zero lower bound: Small open economies in a world of secular stagnation (2016) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:116:y:2019:i:c:p:88-102
DOI: 10.1016/j.jinteco.2018.08.003
Access Statistics for this article
Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, Andrés
More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().