The Effects of Foreign Shocks When Interest Rates Are at Zero

Christopher Erceg, Martin Bodenstein and Luca Guerrieri

No 8006, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In a two-country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound for policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. Departing from many of the existing closed-economy models, the duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the trap, implying more contractionary effects for the home country; conversely, large positive shocks can prompt an early exit, implying effects that are closer to those when the zero bound constraint is not binding.

Keywords: Zero lower bound; Spillover effects; Dsge models (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2010-09
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Citations: View citations in EconPapers (20)

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Related works:
Journal Article: The effects of foreign shocks when interest rates are at zero (2017)
Working Paper: The Effects of Foreign Shocks when Interest Rates are at Zero (2009)
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