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Global vs. Local Liquidity Traps

Authors Cook, David E. View this author's profile
Devereux, Michael B.
Issue Date 2010
Source Seoul Journal of Economics , v. 24, (4), 2011, p. 471-493
Summary This paper examines demand spillovers in a two country open economy model to a demand shock newline (emanating from a single, source country) sufficiently large to push one or both countries into a liquidity trap. The zero lower bound on nominal interest rates keeps the central bank in the source country from fully adjusting monetary policy. We describe a two country New Keynesian model with sufficient home bias so as to exclude symmetric movements in response to demand shocks. We study conditions under which a liquidity trap in one country might spillover to a trading partner. We study, under which conditions, a liquidity trap in one country will lead to a liquidity trap in another country. We also show conditions under which a liquidity trap in another country can spillover into an output expansion in a trading partner.
ISSN 1225-0279
Language English
Format Article