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Liquidity traps in a world economy

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  • Kollmann, Robert
Abstract
This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These “expectations-driven” liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a “fundamentals-driven” liquidity trap.

Suggested Citation

  • Kollmann, Robert, 2021. "Liquidity traps in a world economy," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    • Handle: RePEc:eee:dyncon:v:132:y:2021:i:c:s016518892100141x
    DOI: 10.1016/j.jedc.2021.104206
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    Cited by:

    1. Robert Kollmann, 2021. "Effects of Covid-19 on Euro area GDP and inflation: demand vs. supply disturbances," International Economics and Economic Policy, Springer, vol. 18(3), pages 475-492, July.
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    3. Javier Bianchi & Louphou Coulibaly, 2021. "Liquidity Traps, Prudential Policies, and International Spillovers," Working Papers 780, Federal Reserve Bank of Minneapolis.

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    More about this item

    Keywords

    Zero lower bound; Expectations-driven and fundamentals-driven liquidity traps; Domestic and international shock transmission; Terms of trade; Exchange rate; Net exports;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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