Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130632
Authors: 
Acharya, Sushant
Bengui, Julien
Year of Publication: 
2016
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 765
Abstract: 
This paper explores the role of capital flows and exchange rate dynamics in shaping the global economy's adjustment in a liquidity trap. Using a multi-country model with nominal rigidities, we shed light on the global adjustment since the Great Recession, a period when many advanced economies were pushed to the zero bound on interest rates. We establish three main results. First, when the North hits the zero bound, downstream capital flows alleviate the recession by reallocating demand to the South and switching expenditure toward North goods. Second, a free capital flow regime falls short of supporting efficient demand and expenditure reallocations and induces too little downstream (upstream) flows during (after) the liquidity trap. And third, when it comes to capital flow management, individual countries' incentives to manage their terms of trade conflict with aggregate demand stabilization and global efficiency. This underscores the importance of international policy coordination in liquidity trap episodes.
Subjects: 
capital flows
international spillovers
liquidity traps
uncovered interest parity
capital flow management
policy coordination
optimal monetary policy
JEL: 
E52
F32
F38
F42
F44
Document Type: 
Working Paper

Files in This Item:
File
Size
848.02 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.