DP14424 Global Imbalances and Policy Wars at the Zero Lower Bound

Author(s): Ricardo Caballero, Emmanuel Farhi, Pierre-Olivier Gourinchas
Publication Date: February 2020
Date Revised: January 2021
JEL(s): E0, F3, F4, G1
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14424

This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets, nominal rigidities and an effective lower bound (a ZLB for simplicity). We establish four main results: (i) At the ZLB, creditor countries export their recession abroad, which we illustrate with a new Metzler diagram in quantities; (ii) Beggar-thy-neighbor currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (iii) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; (iv) When there is a scarcity of safe assets, net issuers of safe assets import the recession from abroad.