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Liquidity Traps in a World Economy

Robert Kollmann ()

No 2021-02, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These "expectations-driven" liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a "fundamentals-driven" liquidity trap.

Keywords: Zero lower bound; expectations-driven and fundamentals-driven liquidity traps; domestic and international shock transmission; terms of trade; exchange rate; net exports (search for similar items in EconPapers)
Pages: 52 p.
Date: 2021-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-opm
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Working Paper: Liquidity Traps in a World Economy (2021) Downloads
Working Paper: Liquidity traps in a world economy (2021) Downloads
Working Paper: Liquidity Traps in a World Economy (2021) Downloads
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