The Effects of Foreign Shocks when Interest Rates are at Zero

Martin Bodenstein, Christopher Erceg and Luca Guerrieri

No 983, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

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 on 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. The home economy is more vulnerable to adverse foreign shocks if the neutral rate is low ? consistent with \"secular stagnation\" ? and trade openness is high.

Keywords: Zero lower bound; Spillover effects; DSGE models (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-opm
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Citations: View citations in EconPapers (25)

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Related works:
Journal Article: The effects of foreign shocks when interest rates are at zero (2017)
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 (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:983

DOI: 10.17016/IFDP.2016.983r

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