Munich Personal RePEc Archive

Global Liquidity Traps

Kollmann, Robert (2020): Global Liquidity Traps.

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Abstract

This paper studies fluctuations of interest rates, inflation and output in a two-country New Keynesian business cycle model with a zero lower bound (ZLB) constraint for nominal interest rates. The presence of the ZLB generates multiple equilibria driven by self-fulfilling changes in domestic and foreign inflation expectation. Each country randomly switches in and out of a liquidity trap. In a floating exchange rate regime, liquidity traps can either be synchronized or unsynchronized across countries. This is the case even if countries are perfectly financially integrated. By contrast, in a monetary union, self-fulfilling fluctuations in inflation expectations must be perfectly correlated across countries.

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