Advanced Search
MyIDEAS: Login

Optimal fiscal policy in a world liquidity trap

Contents:

Author Info

  • Cook, David
  • Devereux, Michael B.

Abstract

We construct a model of the international transmission of 'liquidity trap' shocks, and examine the case for international coordination of fiscal policy to respond to the liquidity trap. Integrated financial markets tend to propagate liquidity traps. In a global environment, fiscal policy may be effective in raising GDP when the economy is stuck in a liquidity trap, but it does so in a 'beggar thy neighbor' fashion; when one economy is in a liquidity trap, the cross country spillover effect of fiscal policy is negative. We examine the welfare optimizing policy response to a liquidity trap when countries coordinate on fiscal policy. Fiscal policy may be an effective tool in responding to a liquidity trap, although it is never optimal to use fiscal expansion sufficiently to fully eliminate a downturn. Moreover, there is little case for coordinated global fiscal expansion. For the most part, the country worst hit by a liquidity trap shock should use its own policies to respond, without much help from foreign policies.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0014292110001091
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 4 (May)
Pages: 443-462

as in new window
Handle: RePEc:eee:eecrev:v:55:y:2011:i:4:p:443-462

Contact details of provider:
Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Liquidity trap Monetary policy Fiscal policy International spillovers;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. John F. Cogan & Tobias Cwik & John B. Taylor & Volker Wieland, 2009. "New Keynesian versus Old Keynesian Government Spending Multipliers," NBER Working Papers 14782, National Bureau of Economic Research, Inc.
  2. Davig, Troy & Leeper, Eric M., 2009. "Monetary-Fiscal Policy Interactions and Fiscal Stimulus," CEPR Discussion Papers 7509, C.E.P.R. Discussion Papers.
  3. Lars E.O. Svensson, 2003. "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others," NBER Working Papers 10195, National Bureau of Economic Research, Inc.
  4. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
  5. Benigno, Gianluca & Benigno, Pierpaolo, 2006. "Designing targeting rules for international monetary policy cooperation," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 473-506, April.
  6. Ippei Fujiwara & Kozo Ueda, 2010. "The Fiscal Multiplier and Spillover in a Global Liquidity Trap," IMES Discussion Paper Series 10-E-03, Institute for Monetary and Economic Studies, Bank of Japan.
  7. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
  8. Beetsma, Roel & Jensen, Henrik, 2002. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Working Paper Series 0166, European Central Bank.
  9. Ippei Fujiwara & Nao Sudo & Tomoyuki Nakajima & Yuki Teranishi, 2010. "Global liquidity trap," Globalization and Monetary Policy Institute Working Paper 56, Federal Reserve Bank of Dallas.
  10. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  11. Faia, Ester & Monacelli, Tommaso, 2006. "Optimal Monetary Policy in a Small Open Economy with Home Bias," CEPR Discussion Papers 5522, C.E.P.R. Discussion Papers.
  12. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2009. "The effects of foreign shocks when interest rates are at zero," International Finance Discussion Papers 983, Board of Governors of the Federal Reserve System (U.S.).
  13. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  14. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2009. "When is the government spending multiplier large?," NBER Working Papers 15394, National Bureau of Economic Research, Inc.
  15. Ippei Fujiwara & Nao Sudo & Yuki Teranishi, 2010. "The Zero Lower Bound and Monetary Policy in a Global Economy: A Simple Analytical Investigation," International Journal of Central Banking, International Journal of Central Banking, vol. 6(1), pages 103-134, March.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Fiscal multipliers at the zero bound in an open economy
    by Tyler Cowen in Marginal Revolution on 2012-11-08 11:34:38
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.
  2. Cook, David & Devereux, Michael B., 2011. "Cooperative fiscal policy at the zero lower bound," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 465-486.
  3. Flotho, Stefanie, 2012. "Monetary and Fiscal Policy in a Monetary Union under the Zero Lower Bound constraint," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62028, Verein für Socialpolitik / German Economic Association.
  4. David Cook & Michael B. Devereux, 2011. "Sharing the burden: monetary and fiscal responses to a world liquidity trap," Globalization and Monetary Policy Institute Working Paper 84, Federal Reserve Bank of Dallas.
  5. Ippei Fujiwara & Kozo Ueda, 2012. "The Fiscal Multiplier and Spillover in a Global Liquidity Trap," CAMA Working Papers 2012-17, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  6. Stefanie Flotho, 2012. "Monetary and Fiscal Policy in a Monetary Union under the Zero Lower Bound constraint," Discussion Paper Series 20, Department of International Economic Policy, University of Freiburg, revised Jun 2012.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:55:y:2011:i:4:p:443-462. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.