Discussion paper

DP14424 Global Imbalances and Policy Wars at the Zero Lower Bound

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.


Farhi, E, R Caballero and P Gourinchas (eds) (2020), “DP14424 Global Imbalances and Policy Wars at the Zero Lower Bound”, CEPR Press Discussion Paper No. 14424. https://cepr.org/publications/dp14424-0