Global Imbalances and Policy Wars at the Zero Lower Bound

Safe Assets

Ricardo Caballero (), Emmanuel Farhi and Pierre-Olivier Gourinchas

The Review of Economic Studies, 2021, vol. 88, issue 6, 2570-2621

Abstract: This article explores the consequences of extremely low real interest rates in a world with integrated but heterogeneous capital markets, nominal rigidities, and an effective lower bound [a zero lower bound (ZLB) for simplicity]. We establish four main results: (1) At the ZLB, creditor countries export their recession abroad, which we illustrate with a new Metzler diagram in quantities; (2) Beggar-thy-neighbour currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (3) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; and (4) When there is a scarcity of safe assets, net issuers of these assets import the recession from abroad.

Keywords: Liquidity and safety traps; Safe assets; Global recession; Currency wars; Trade wars; Current account; Capital flows; Reserve currency; Secular stagnation; Public debt; Fiscal policy; Budget balanced fiscal expansion; E0; F3; F4; G1 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Global Imbalances and Policy Wars at the Zero Lower Bound (2020)
Working Paper: Global Imbalances and Policy Wars at the Zero Lower Bound (2015)
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