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The paradox of global thrift

Luca Fornaro and Federica Romei

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the economy. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In fact, prudential policies generate a rise in the global supply of savings and a drop in global aggregate demand. Weaker global aggregate demand depresses output in countries at the zero lower bound. Due to this effect, non-cooperative financial and fiscal policies might lead to a fall in global output and welfare.

Keywords: Liquidity traps; zero lower bound; capital flows; fi scal policies; macroprudential policies; current account policies; aggregate demand externalities; international cooperation. (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 F41 F42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-opm
Date: 2016-12, Revised 2018-11
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Working Paper: The paradox of global thrift (2018) Downloads
Working Paper: The Paradox of Global Thrift (2018) Downloads
Working Paper: The Paradox of Global Thrift (2018) Downloads
Working Paper: The Paradox of Global Thrift (2018) Downloads
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