Citation

Discussion Paper Details

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Title: Liquidity Traps in a World Economy

Author(s): Robert Kollmann

Publication Date: January 2021

Keyword(s): domestic and international shock transmission, Exchange rate, expectations-driven and fundamentals-driven liquidity traps, Net exports, terms of trade and zero lower bound

Programme Area(s): International Macroeconomics and Finance

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.

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Bibliographic Reference

Kollmann, R. 2021. 'Liquidity Traps in a World Economy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15631