Global Imbalances and Policy Wars at the Zero Lower Bound

67 Pages Posted: 9 Mar 2020

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Emmanuel Farhi

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Pierre-Olivier Gourinchas

University of California, Berkeley - Department of Economics; University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: January 16, 2020

Abstract

This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. We establish four main results: (i) Liquidity traps spread to the rest of the world through the current account, which we illustrate with a new Metzler diagram in quantities; (ii) Beggar-thy-neighbor currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (iii) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; (iv) At the ZLB, net issuers of safe assets experience a disproportionate share of the global stagnation.

Keywords: Liquidity and Safety Traps, Safe Assets, Global Recession, Currency Wars, Trade Wars, Current Account, Capital Flows, Reserve Currency, Secular Stagnation, Public Debt, Fiscal Policy, Balanced Budget

JEL Classification: E0, F3, F4, G1

Suggested Citation

Caballero, Ricardo J. and Farhi, Emmanuel and Gourinchas, Pierre-Olivier, Global Imbalances and Policy Wars at the Zero Lower Bound (January 16, 2020). Available at SSRN: https://ssrn.com/abstract=3534311 or http://dx.doi.org/10.2139/ssrn.3534311

Ricardo J. Caballero (Contact Author)

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Emmanuel Farhi

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Pierre-Olivier Gourinchas

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University of California, Berkeley - Economic Analysis & Policy Group ( email )

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