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Global Imbalances and Policy Wars at the Zero Lower Bound

Ricardo J. Caballero, Emmanuel Farhi, Pierre-Olivier Gourinchas

NBER Working Paper No. 21670
Issued in October 2015, Revised in February 2020
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, International Finance and Macroeconomics, Monetary Economics

This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. We establish four main results: (i) Liquidity traps spread to the rest of the world through the current account, which we illustrate with a new Metzler diagram in quantities; (ii) Beggar-thy-neighbor currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (iii) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; (iv) At the ZLB, net issuers of safe assets experience a disproportionate share of the global stagnation.

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Document Object Identifier (DOI): 10.3386/w21670

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