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Step away from the zero lower bound: Small open economies in a world of secular stagnation

Corsetti, Giancarlo, Mavroeidi, Eleonora, Thwaites, Gregory and Wolf, Martin (2017) Step away from the zero lower bound: Small open economies in a world of secular stagnation. CFM discussion paper series (CFM-DP2017-22). Centre For Macroeconomics, London, UK.

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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 can be beggar thy self, raising employment but actually lowering welfare. 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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2017 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 12 Dec 2017 09:06
Last Modified: 12 Apr 2019 23:03
URI: http://eprints.lse.ac.uk/id/eprint/86153

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