The international transmission of asset market shocks in liquidity traps
We build a two-country heterogenous-agent non-Ricardian model featuring asset scarcity and financial frictions in international capital markets. Due to the non-Ricardian nature of our framework, a demand for liquidity emerges and the supply of bonds matters. We show that shocks affecting the supply...
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| Other Authors: | , |
| Format: | eBook |
| Language: | English |
| Published: |
London
Centre for Economic Policy Research
2024
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| Series: | Discussion paper series / Centre for Economic Policy Research
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| Subjects: | |
| Online Access: | |
| Collection: | CEPR Discussion Papers - Collection details see MPG.ReNa |
| Summary: | We build a two-country heterogenous-agent non-Ricardian model featuring asset scarcity and financial frictions in international capital markets. Due to the non-Ricardian nature of our framework, a demand for liquidity emerges and the supply of bonds matters. We show that shocks affecting the supply or demand of assets have very different international spillovers for an economy in a liquidity trap. A decrease in the supply of assets issued abroad leads to an asset shortage domestically. In normal times, the nominal interest rate decreases, stimulating investment and output. In a liquidity trap, deflation hits instead and the currency appreciates, causing a recession. |
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| Physical Description: | 34 Seiten Illustrationen |