The Paradox of Global Thrift

59 Pages Posted: 1 May 2018 Last revised: 18 Jun 2018

See all articles by Luca Fornaro

Luca Fornaro

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Barcelona Graduate School of Economics (Barcelona GSE)

Federica Romei

Luiss Guido Carli University

Multiple version iconThere are 2 versions of this paper

Date Written: April 2018

Abstract

This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the economy. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In fact, prudential policies generate a rise in the global supply of savings and a drop in global aggregate demand. Weaker global aggregate demand depresses output in countries at the zero lower bound. Due to this effect, non-cooperative financial and fiscal policies might lead to a fall in global output and welfare.

Keywords: aggregate demand externalities, Capital Flows, current account policies, fiscal policies, international cooperation, Liquidity traps, macroprudential policies, zero lower bound

JEL Classification: E32, E44, E52, F41, F42

Suggested Citation

Fornaro, Luca and Romei, Federica, The Paradox of Global Thrift (April 2018). CEPR Discussion Paper No. DP12894, Available at SSRN: https://ssrn.com/abstract=3171162

Luca Fornaro (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Federica Romei

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
248
PlumX Metrics