David Cook

Hong Kong University of Science & Technology
Department of Economics
Clear Water Bay
Kowloon, HONG KONG


NBER Working Papers and Publications

October 2013The Optimal Currency Area in a Liquidity Trap
with Michael B. Devereux: w19588
Open economy macro theory says that when a country is subject to idiosyncratic macro shocks, it should have its own currency and a flexible exchange rate. But recently in many countries policy rates have been pushed down close to the lower bound, limiting the ability of policy-makers to accommodate shocks, even in open economies with flexible exchange rates. In this paper, we show that if the zero bound constraint is binding and policy lacks an effective `forward guidance' mechanism, a flexible exchange rate system may be inferior to a single currency area, even when there are country-specific macro shocks. When monetary policy is constrained by the zero bound, under independent currencies with flexible exchange rates, the exchange rate exacerbates the impact of shocks. Remarkably, this ...
June 2011Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap
with Michael B. Devereux: w17131
With integrated trade and financial markets, a collapse in aggregate demand in a large country can cause 'natural real interest rates' to fall below zero in all countries, giving rise to a global 'liquidity trap'. This paper explores the policy choices that maximize the joint welfare of all countries following such a shock, when governments cooperate on both fiscal and monetary policy. Adjusting to a large negative demand shock requires raising world aggregate demand, as well as redirecting demand towards the source (home) country. The key feature of demand shocks in a liquidity trap is that relative prices respond perversely. A negative shock causes an appreciation of the home terms of trade, exacerbating the slump in the home country. At the zero bound, the home country cannot counter th...

Published: David Cook & Michael B. Devereux, 2013. "Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 190-228, July. citation courtesy of

February 2009Comment on "Hong Kong and Shanghai:Yesterday, Today and Tomorrow (Joint with Eric Chan)"
in Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, Volume 18, Takatoshi Ito and Andrew K. Rose, editors
September 2006Stock Market Liquidity and the Macroeconomy: Evidence from Japan
with Woon Gyu Choi
in Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, Takatoshi Ito and Andrew K. Rose, editors
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