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The Paradox of Global Thrift

Luca Fornaro and Federica Romei

No 12894, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the economy. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In fact, prudential policies generate a rise in the global supply of savings and a drop in global aggregate demand. Weaker global aggregate demand depresses output in countries at the zero lower bound. Due to this effect, non-cooperative financial and fiscal policies might lead to a fall in global output and welfare.

Keywords: aggregate demand externalities; Capital Flows; current account policies; fiscal policies; international cooperation; liquidity traps; macroprudential policies; zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 F41 F42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
Date: 2018-04
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Working Paper: The paradox of global thrift (2019) Downloads
Working Paper: The paradox of global thrift (2018) Downloads
Working Paper: The Paradox of Global Thrift (2018) Downloads
Working Paper: The Paradox of Global Thrift (2018) Downloads
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