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Why may large economies suffer more at the zero lower bound?

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  • Michal Brzoza-Brzezina

Abstract

This paper compares the consequences of hitting the zero lower bound in small open and large closed economies. I costruct a two-economy New Kenynesian model and calibrate it so that one economy is small and open and the second large and closed. Then I conduct a number of experiments assuming that the zero lower bound binds for one or the other economy. At the ZLB bad shocks are amplified and good shocks dampened. I show that these modifications are much stronger in the large than in the small economy. As a result the large economy may suffer more at the ZLB.

Suggested Citation

  • Michal Brzoza-Brzezina, 2016. "Why may large economies suffer more at the zero lower bound?," Working Papers 2016-012, Warsaw School of Economics, Collegium of Economic Analysis.
  • Handle: RePEc:sgh:kaewps:2016012
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    1. Michal Brzoza-Brzezina & Marcin Kolasa & Mateusz Szetela, 2016. "Is Poland at risk of the zero lower bound?," Bank i Kredyt, Narodowy Bank Polski, vol. 47(3), pages 195-226.

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    More about this item

    Keywords

    zero lower bound; small open economy; amplification of shocks;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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