Liquidity Traps, Prudential Policies, and International Spillovers
Working Paper 30038
DOI 10.3386/w30038
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We investigate optimal monetary and macroprudential policies in an open economy with aggregate demand externalities and an occasionally binding zero lower bound constraint. The optimal policy balances output stabilization and capital flow management, potentially requiring lower or higher nominal interest rates. We show how international spillovers operate through the world real rate and call for macroprudential policies. Finally, we establish that a world economy with macroprudential policy welfare dominates a laissez-faire regime, in stark contrast with recent concerns.