The Paradox of Global Thrift

91 Pages Posted: 21 Dec 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: December 21, 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: liquidity traps, zero lower bound, capital flows, fiscal policies, macroprudential policies, current account policies, aggregate demand externalities, international cooperation

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

Suggested Citation

Fornaro, Luca and Romei, Federica, The Paradox of Global Thrift (December 21, 2018). Banco de Espana Working Paper No. 1845, Available at SSRN: https://ssrn.com/abstract=3305091 or http://dx.doi.org/10.2139/ssrn.3305091

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

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