The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap

Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap

American Economic Journal Macroeconomics ◽

10.1257/mac.5.3.190 ◽

2013 ◽

Vol 5 (3) ◽

pp. 190-228 ◽

Cited By ~ 15

Author(s):

David Cook ◽

Michael B Devereux

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Optimal Policy ◽

Liquidity Trap ◽

Relative Prices ◽

Policy Responses ◽

Global Liquidity ◽

Initial Shock ◽

Monetary And Fiscal Policy ◽

Zero Bound

This paper analyzes optimal policy responses to a global liquidity trap. The key feature of this environment is that relative prices respond perversely. A fall in demand in one country causes an appreciation of its terms of trade, exacerbating the initial shock. At the zero bound, this country cannot counter this shock. Then it may be optimal for the partner country to raise interest rates. The partner may set a positive policy interest rate, even though its “natural interest rate” is below zero. An optimal policy response requires a mutual interaction between monetary and fiscal policy. (JEL E12, E32, E44, E52, E62, F44, G01)

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Gains from interest-rate smoothing in a small open economy with zero-bound aversion

The North American Journal of Economics and Finance ◽

10.1016/j.najef.2009.01.001 ◽

2009 ◽

Vol 20 (1) ◽

pp. 24-45 ◽

Cited By ~ 1

Author(s):

Timothy Kam

Keyword(s):

Interest Rate ◽

Open Economy ◽

Small Open Economy ◽

Zero Bound

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SHOULD THE PRIVATE SECTOR PROVIDE PUBLIC CAPITAL?

Macroeconomic Dynamics ◽

10.1017/s1365100507060130 ◽

2007 ◽

Vol 11 (3) ◽

pp. 318-346

Author(s):

SANTANU CHATTERJEE

Keyword(s):

Open Economy ◽

Public Capital ◽

Borrowing Constraints ◽

International Capital ◽

Standard Assumption ◽

Production Externalities ◽

International Capital Markets ◽

Private Provision ◽

Large Production ◽

Government Provision

The choice between private and government provision of a productive public good like infrastructure (public capital) is examined in the context of an endogenously growing open economy. The accumulation of public capital need not require government provision, in contrast to the standard assumption in the literature. Even with an efficient government, the relative costs and benefits of government and private provision depend crucially on the economy's underlying structural conditions and borrowing constraints in international capital markets. Countries with limited substitution possibilities and large production externalities may benefit from governments encouraging private provision of public capital through targeted investment subsidies. By contrast, countries with flexible substitution possibilities and relatively smaller externalities may benefit either from governments directly providing public capital or from regulation of private providers. The transitional dynamics also are shown to depend on the underlying elasticity of substitution and the size of the production externality.

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The long-run stability of a small, open economy under crawling peg regime

Acta Oeconomica ◽

10.1556/aoecon.52.2002.1.3 ◽

2002 ◽

Vol 52 (1) ◽

pp. 57-78

Author(s):

S. Çiftçioğlu

Keyword(s):

Exchange Rate ◽

Open Economy ◽

Risk Premium ◽

Small Open Economy ◽

Exchange Rate Policy ◽

Price Stability ◽

Output Stability ◽

Long Run ◽

The Exchange Rate ◽

The Impact

The paper analyses the long-run (steady-state) output and price stability of a small, open economy which adopts a “crawling-peg” type of exchange-rate regime in the presence of various kinds of random shocks. Analytical and simulation results suggest that with the exception of money demand shocks, an exchange rate policy which involves a relatively higher rate of indexation of the exchange rate to price level is likely to lead to the worsening of price stability for all types of shocks. On the other hand, the impact of adopting such a policy on output stability depends on the type of the shock; for policy shocks to the exchange rate and shocks to output demand, output stability is worsened whereas for the shocks to risk premium of domestic assets, supply price of domestic output and the wage rate, better output stability is achieved in the long run.

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