The International Transmission of Asset Market Shocks in Liquidity Traps

Philippe Bacchetta, Kenza Benhima, Yannick Kalantzis and Maxime Phillot

No 18904, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We build a two-country heterogenous-agent non-Ricardian model featuring asset scarcity and financial frictions in international capital markets. Due to the non-Ricardian nature of our framework, a demand for liquidity emerges and the supply of bonds matters. We show that shocks affecting the supply or demand of assets have very different international spillovers for an economy in a liquidity trap. A decrease in the supply of assets issued abroad leads to an asset shortage domestically. In normal times, the nominal interest rate decreases, stimulating investment and output. In a liquidity trap, deflation hits instead and the currency appreciates, causing a recession.

Keywords: Zero lower bound; Liquidity trap; Asset scarcity (search for similar items in EconPapers)
JEL-codes: E22 E40 F32 (search for similar items in EconPapers)
Date: 2024-03
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP18904 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
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:cpr:ceprdp:18904

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP18904

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().