Citation

Discussion Paper Details

Please find the details for DP8006 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: The Effects of Foreign Shocks When Interest Rates Are at Zero

Author(s): Martin Bodenstein, Christopher Erceg and Luca Guerrieri

Publication Date: September 2010

Keyword(s): DSGE models, spillover effects and zero lower bound

Programme Area(s): International Macroeconomics

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 for 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; conversely, large positive shocks can prompt an early exit, implying effects that are closer to those when the zero bound constraint is not binding.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8006

Bibliographic Reference

Bodenstein, M, Erceg, C and Guerrieri, L. 2010. 'The Effects of Foreign Shocks When Interest Rates Are at Zero'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8006