Liquidity Traps in a Monetary Union
Copyright policy )Liquidity Traps in a Monetary Union
Abstract The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low. This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, a rise in government purchases in an individual country has a weak effect on GDP in the rest of the union. The results here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery.
- Ludwig-Maximilians-Universität München Germany
- Paris-East Créteil University France
- Economic Policy Institute United States
- University of Paris France
- Centre for Economic Policy Research United Kingdom
Money and Interest Rates: General, General [International Finance], Economie européenne, terms of trade, E3 - Prices, international fiscal spillovers, Macroeconomic Aspects of International Trade and Finance: General, Business Fluctuations, International Factor Movements and International Business: General, International Finance: General, Macroéconomie et économie monétaire, Euro Area, and Cycles: General (includes Measurement and Data), E30, F30, General [Money and Interest Rates], Prices, E4 - Money and Interest Rates, General [Macroeconomic Aspects of International Trade and Finance], F3 - International Finance, monetary union, liquidity trap, General [International Factor Movements and International Business], F2 - International Factor Movements and International Business, F4 - Macroeconomic Aspects of International Trade and Finance, Politique monétaire et banque centrale, Zero lower bound, E40, F40, Cycles et fluctuations économiques, General (includes Measurement and Data) [Prices, Business Fluctuations, and Cycles], and Cycles, F20
Money and Interest Rates: General, General [International Finance], Economie européenne, terms of trade, E3 - Prices, international fiscal spillovers, Macroeconomic Aspects of International Trade and Finance: General, Business Fluctuations, International Factor Movements and International Business: General, International Finance: General, Macroéconomie et économie monétaire, Euro Area, and Cycles: General (includes Measurement and Data), E30, F30, General [Money and Interest Rates], Prices, E4 - Money and Interest Rates, General [Macroeconomic Aspects of International Trade and Finance], F3 - International Finance, monetary union, liquidity trap, General [International Factor Movements and International Business], F2 - International Factor Movements and International Business, F4 - Macroeconomic Aspects of International Trade and Finance, Politique monétaire et banque centrale, Zero lower bound, E40, F40, Cycles et fluctuations économiques, General (includes Measurement and Data) [Prices, Business Fluctuations, and Cycles], and Cycles, F20
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