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Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap

Authors Cook, David View this author's profile
Devereux, Michael B.
Issue Date 2013
Source American Economic Journal: Macroeconomics , v. 5, (3), July 2013, p. 190-228
Summary This paper analyzes optimal policy responses to a global liquidity trap. The key feature of this environment is that relative prices respond perversely. A fall in demand in one country causes an appreciation of its terms of trade, exacerbating the initial shock. At the zero bound, this country cannot counter this shock. Then it may be optimal for the partner country to raise interest rates. The partner may set a positive policy interest rate, even though its "natural interest rate" is below zero. An optimal policy response requires a mutual interaction between monetary and fiscal policy.
ISSN 1945-7707
Language English
Format Article
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