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Robert Kollmann, Liquidity traps in a monetary union, Oxford Economic Papers, Volume 73, Issue 4, October 2021, Pages 1581–1603, https://doi.org/10.1093/oep/gpab019
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Abstract
The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low. This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, a rise in government purchases in an individual country has a weak effect on GDP in the rest of the union. The results here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery.