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Liquidity Traps in a World Economy

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  • Robert Kollmann

Abstract

This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These "expectations-driven" liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a "fundamentals-driven" liquidity trap.

Suggested Citation

  • Robert Kollmann, 2021. "Liquidity Traps in a World Economy," Working Papers ECARES 2021-02, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/316780
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