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Liquidity Traps, Capital Flows

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  • Julien Bengui

    (Université de Montréal)

  • Sushant Acharya

    (Federal Reserve Bank of New York)

Abstract

This paper explores the role of capital flows and exchange rate dynamics in shaping the global economy’s adjustment in a liquidity trap. Using a multi-country model with nominal rigidities, we shed light on the global adjustment since the Great Recession, a period when many advanced economies were pushed to the zero bound on interest rates. We establish three main results. First, when the North hits the zero bound, downstream capital flows alleviate the recession by reallocating demand to the South and switching expenditure toward North goods. Second, a free capital flow regime falls short of supporting efficient demand and expenditure reallocations and induces too little downstream (upstream) flows during (after) the liquidity trap. And third, when it comes to capital flow management, individual countries’ incentives to manage their terms of trade conflict with aggregate demand stabilization and global efficiency. This underscores the importance of international policy coordination in liquidity trap episodes.

Suggested Citation

  • Julien Bengui & Sushant Acharya, 2016. "Liquidity Traps, Capital Flows," 2016 Meeting Papers 144, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:144
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    Cited by:

    1. Acharya, Sushant & Bengui, Julien, 2018. "Liquidity traps, capital flows," Journal of International Economics, Elsevier, vol. 114(C), pages 276-298.
    2. Luca Fornaro & Federica Romei, 2016. "The paradox of global thrift," Economics Working Papers 1609, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2019.
    3. Anton Korinek & Damiano Sandri, 2016. "Capital Controls or Macroprudential Regulation?," NBER Chapters,in: NBER International Seminar on Macroeconomics 2015 National Bureau of Economic Research, Inc.
    4. Gauti B. Eggertsson & Neil R. Mehrotra & Sanjay R. Singh & Lawrence H. Summers, 2016. "A Contagious Malady? Open Economy Dimensions of Secular Stagnation," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 581-634, November.
    5. Luca Fornaro, 2017. "Aggregate Demand Externalities in a Global Liquidity Trap," 2017 Meeting Papers 139, Society for Economic Dynamics.
    6. Louphou COULIBALY, 2018. "Monetary Policy in Sudden Stop-Prone Economies," Cahiers de recherche 06-2018, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    7. Amador, Manuel & Bianchi, Javier & Bocola, Luigi & Perri, Fabrizio, 2016. "Reverse speculative attacks," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 125-137.

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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