Must-Read: Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas: Welcome to the ZLB Global Economy

Must-Read: Am I wrong in seeing all this as basically: Triffin Dilemma II?

Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas: Welcome to the ZLB Global Economy: “Via expenditure-switching effects, the exchange rate affects the distribution…

…of a global liquidity trap across countries… fertile grounds for ‘beggar-thy-neighbour’ devaluations…. By the same token, our analysis implies that if a currency appreciates, possibly because it is perceived as a ‘reserve currency,’ then this economy would experience a disproportionate share of the global liquidity trap…. Arguably, this mechanism captures a dimension of the exchange rate appreciation struggles of Switzerland during the recent European turmoil, of Japan before the implementation of ‘Abenomics’, and of the US currently….

It is possible for some regions of the world to escape the liquidity trap if their inflation targets are sufficiently high…. Both issuing additional debt or a balance budget increase in government spending can potentially address the net shortage of assets and stimulate the economy in all countries, alleviating a global liquidity trap. They are associated with large Keynesian multipliers…. World interest rates and global imbalances go hand in hand: countries with large safe asset shortages run current account surpluses and drag the world interest rate down. Once at the ZLB, the global asset market is in disequilibrium: there is a global safe asset shortage that cannot be resolved by lower world interest rates… [that] is instead dissipated by a world recession… propagated by global imbalances…. Unfortunately, this state of affairs is not likely to go away any time soon. In particular, there are no good substitutes in sight for the role played by US Treasuries in satisfying global safe asset demand…

November 9, 2015


Brad DeLong
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