Paper #1609

Title:

The paradox of global thrift

Authors:

Luca Fornaro and Federica Romei

Date:

December 2016 (Revised: April 2019)

Abstract:

This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the economy. We show that these policies, while effective from the perspective of individual countries, might backre if applied on a global scale. In fact, prudential policies generate a rise in the global supply of savings and a drop in global aggregate demand. Weaker global aggregate demand depresses output in countries at the zero lower bound. Due to this effect, non-cooperative nancial and scal policies might lead to a fall in global output and welfare.

Keywords:

Liquidity traps, zero lower bound, capital flows, fiscal policies, macroprudential policies, current account policies, aggregate demand externalities, international cooperation.

JEL codes:

E32, E44, E52, F41, F42.

Area of Research:

Macroeconomics and International Economics

Published in:

American Economic Review, 109 (11), 2019, 3745-3779

Comment:

Attachments:
Online Appendix

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