The Effects of Foreign Shocks When Interest Rates are at Zero
Year: 2009
Type: article
Abstract: In a two-country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound for policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. The duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the liquidity trap, implying more contractionary effects for the home country conversely, large positive shocks can prompt an early exit, implying effects that are closer to those when the zero bound constraint is not binding.
Institutions: Federal Reserve, Federal Reserve Board of Governors
Language: English
Domain: Social Sciences
Open Access status: hybrid
OpenAlex ID: W4298840221