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Quantitative easing in an open economy—Not a liquidity but a reserve trap

Author

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  • Herbst, Anthony F.
  • Wu, Joseph S.K.
  • Ho, Chi Pui

Abstract

Expansionary monetary policy is ineffective in a liquidity trap. In another case, which we call a “reserve trap,” money supply increase is trapped in bank reserves; there is no credit expansion through the banking system. In such case, quantitative easing (QE) will not boost credit to the real sector and revitalize the economy. To analyze a reserve trap, we modify the open economy model to include multiple interest rates. Trade is included since exports can be financed externally even during domestic credit constriction. We show the conditions under which QE can lead to currency depreciation and trigger an export-led recovery.

Suggested Citation

  • Herbst, Anthony F. & Wu, Joseph S.K. & Ho, Chi Pui, 2014. "Quantitative easing in an open economy—Not a liquidity but a reserve trap," Global Finance Journal, Elsevier, vol. 25(1), pages 1-16.
    • Handle: RePEc:eee:glofin:v:25:y:2014:i:1:p:1-16
    DOI: 10.1016/j.gfj.2014.03.004
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    Cited by:

    1. J. F. Li & Z. X. Lin, 2016. "Social benefit expenditures and stagflation: evidence from the United States," Applied Economics, Taylor & Francis Journals, vol. 48(55), pages 5340-5347, November.
    2. Dana Kiseľáková & Paulina Filip & Erika Onuferová & Tomáš Valentiny, 2020. "The Impact of Monetary Policies on the Sustainable Economic and Financial Development in the Euro Area Countries," Sustainability, MDPI, vol. 12(22), pages 1-21, November.
    3. Mehmet ORHAN & Halil İbrahim ÇELİKEL, 2014. "The Spillover Effects of Fed’s Policies with Emphasis to the Fragile Five," Journal of Economics and Behavioral Studies, AMH International, vol. 6(12), pages 1011-1020.
    4. Pick-Schen Yip & Wee-Yeap Lau & Robert Brooks, 2023. "The Liquidity Effect of the U.S. QE on Sovereign Yield Spreads of Commodity-Exporting Countries," Commodities, MDPI, vol. 2(2), pages 1-16, April.
    5. Anthony F. Herbst, 2015. "Monetary morphs into fiscal: the Fed's great adventure," Economics and Business Letters, Oviedo University Press, vol. 4(2), pages 79-86.

    More about this item

    Keywords

    Quantitative easing; Credit expansion; Macroeconomics; Export-led;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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