Step away from the zero lower bound: Small open economies in a world of secular stagnation
- Author(s)
- Giancarlo Corsetti, Eleonora Mavroeidi, Gregory Thwaites, Martin Wolf
- Abstract
We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape has a beggar-thy-self effect, that may end up lowering welfare while eliminating underemployment. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities' ability to rescue the economy from stagnation.
- Organisation(s)
- Department of Economics
- External organisation(s)
- University of Cambridge, Organisation for Economic Cooperation and Development (OECD), Bank of England
- Journal
- Journal of International Economics
- Volume
- 116
- Pages
- 88-102
- No. of pages
- 15
- ISSN
- 0022-1996
- DOI
- https://doi.org/10.1016/j.jinteco.2018.08.003
- Publication date
- 08-2018
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502046 Economic policy, 502018 Macroeconomics
- Keywords
- ASJC Scopus subject areas
- Economics and Econometrics, Finance
- Portal url
- https://ucrisportal.univie.ac.at/en/publications/f3b3b856-f654-4818-a0b5-81bf7a882f9c