Working Paper: NBER ID: w21670
Authors: Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
Abstract: This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets, nominal rigidities and an effective lower bound (a ZLB for simplicity). We establish four main results: (i) At the ZLB, creditor countries export their recession abroad, 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) When there is a scarcity of safe assets, net issuers of safe assets import the recession from abroad.
Keywords: Global Imbalances; Currency Wars; Zero Lower Bound; Public Debt; Fiscal Policy
JEL Codes: E0; F3; F4; G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Current Account (F32) | Transmission of Recession (F42) |
| Current Account (F32) | Economic Conditions Across Borders (F69) |
| Currency and Trade Wars (F31) | Redistribution of Economic Activity (R11) |
| Fiscal Deficits and Public Debt Issuance (H68) | Global Spillovers (F69) |
| Scarcity of Safe Assets (G19) | Importing Recessions (F44) |
| Creditor Countries (F34) | Exporting Recession (F44) |
| Safe Public Debt Issuance (H63) | Expansionary Effect Everywhere (E60) |