This paper examines demand spillovers in a two country open economy model to a demand shock newline (emanating from a single, source country) sufficiently large to push one or both countries into a liquidity trap. The zero lower bound on nominal interest rates keeps the central bank in the...

With integrated trade and financial markets, a collapse in aggregate demand in a large country can cause 'natural real interest rates' to fall below zero in all countries, giving rise to a global 'liquidity trap'. This paper explores the policy choices that maximize the joint welfare of all...

The 'International Policy Trilemma' refers to the constraint on independent monetary policy that is forced on a country which remains open to international financial markets and simultaneously pursues an exchange rate target. This paper shows that, in a global economy with open financial...

The 'International Policy Trilemma' refers to the constraint on independent monetary policy that is forced on a country which remains open to international financial markets and simultaneously pursues an exchange rate target. This paper shows that, in a global economy with open financial...

With integrated trade and financial markets, a collapse in aggregate demand in a large country can cause 'natural real interest rates' to fall below zero in all countries, giving rise to a global 'liquidity trap'. This paper explores the policy choices that maximize the joint welfare of all...

Recent data show substantial increases in the size of gross external asset and liability positions. The implications of these developments for optimal conduct of monetary policy are analyzed in a standard open economy model which is augmented to allow for endogenous portfolio choice. The model...

Recent data show substantial increases in the size of gross external asset and liability positions. The implications of these developments for optimal conduct of monetary policy are analyzed in a standard open economy model which is augmented to allow for endogenous portfolio choice. The model...

Open economy macro theory says that when a country is subject to idiosyncratic macro shocks, it should have its own currency and a flexible exchange rate. But recently in many countries policy rates have been pushed down close to the lower bound, limiting the ability of policy-makers to...

Open economy macro theory says that when a country is subject to idiosyncratic macro shocks, it should have its own currency and a flexible exchange rate. But recently in many countries policy rates have been pushed down close to the lower bound, limiting the ability of policy-makers to...

This paper presents a model comparing the optimal degree of asset class diversification abroad by a central bank and a sovereign wealth fund. We show that if the central bank manages its foreign asset holdings in order to meet balance of payments needs, particularly in reducing the probability...