Liquidity Traps, Capital Flows

Julien Bengui and Sushant Acharya

No 144, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: This paper explores the role of capital flows and exchange rate dynamics in shaping the global economy’s adjustment in a liquidity trap. Using a multi-country model with nominal rigidities, we shed light on the global adjustment since the Great Recession, a period when many advanced economies were pushed to the zero bound on interest rates. We establish three main results. First, when the North hits the zero bound, downstream capital flows alleviate the recession by reallocating demand to the South and switching expenditure toward North goods. Second, a free capital flow regime falls short of supporting efficient demand and expenditure reallocations and induces too little downstream (upstream) flows during (after) the liquidity trap. And third, when it comes to capital flow management, individual countries’ incentives to manage their terms of trade conflict with aggregate demand stabilization and global efficiency. This underscores the importance of international policy coordination in liquidity trap episodes.

Date: 2016
New Economics Papers: this item is included in nep-mon and nep-opm
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Liquidity traps, capital flows (2018)
Working Paper: Liquidity traps, capital flows (2016)
Working Paper: Liquidity traps, capital flows (2015)
Working Paper: Liquidity Traps, Capital Flows (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:144

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