Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap
- (pp. 190-228)
Abstract
This paper analyzes optimal policy responses to a global liquidity trap. The key feature of this environment is that relative prices respond perversely. A fall in demand in one country causes an appreciation of its terms of trade, exacerbating the initial shock. At the zero bound, this country cannot counter this shock. Then it may be optimal for the partner country to raise interest rates. The partner may set a positive policy interest rate, even though its “natural interest rate†is below zero. An optimal policy response requires a mutual interaction between monetary and fiscal policy.Citation
Cook, David, and Michael B. Devereux. 2013. "Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap." American Economic Journal: Macroeconomics, 5 (3): 190-228. DOI: 10.1257/mac.5.3.190Additional Materials
JEL Classification
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- E62 Fiscal Policy
- F44 International Business Cycles
- G01 Financial Crises
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