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

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We study how small open economies can engineer an escape from deflation and unemployment in a global secular stagnation. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment requires a dynamic depreciation of the exchange rate, without prejudice for domestic inflation targeting. However, if depreciation has strong income and valuation effects, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that, while a relaxation in the Effective Lower Bound (ELB) can work as a means of raising employment and inflation in financially closed economies, it may have exactly the opposite effect when economies are financially open.

Keywords: Small open economy; secular stagnation; capital controls; optimal policy; zero lower bound (search for similar items in EconPapers)
JEL-codes: E62 F41 (search for similar items in EconPapers)
Date: 2016-08-15
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
Note: gc422
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Step away from the zero lower bound: Small open economies in a world of secular stagnation (2019)
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)
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