Secular Stagnation in the Open Economy
14 Pages Posted: 18 Apr 2016
Date Written: April 2016
Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth – now characterize much of the global economy. We consider a simple two-country textbook model to examine how capital markets transmit secular stagnation and to study policy externalities across countries. We find capital flows transmit recessions in a world with low interest rates and that policies that trigger current account surpluses are beggar-thy-neighbor. Monetary expansion cannot eliminate a secular stagnation and may have beggar-thy-neighbor effects, while sufficiently large fiscal interventions can eliminate a secular stagnation and carry positive externalities.
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