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Review of Economic Studies Vol. 88 No. 6 2021

Global Imbalances and Policy Wars at the Zero Lower Bound

Ricardo J. Caballero1; Emmanuel Farhi2; Pierre‐Olivier Gourinchas3

1 MIT, NBER and CEPR · 2 Harvard, NBER and CEPR · 3 University of California, Berkeley, NBER, and CEPR

open access

Abstract

This article explores the consequences of extremely low real interest rates in a world with integrated but heterogeneous capital markets, nominal rigidities, and an effective lower bound [a zero lower bound (ZLB) for simplicity]. We establish four main results: (1) At the ZLB, creditor countries export their recession abroad, which we illustrate with a new Metzler diagram in quantities; (2) Beggar-thy-neighbour currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (3) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; and (4) When there is a scarcity of safe assets, net issuers of these assets import the recession from abroad.

DOI
10.1093/restud/rdab015
Volume
88
Issue
6
Pages
2570-2621
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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