Seminar

Liquidity Traps, Capital Flows

Sushant Acharya (Federal Reserve Bank of New York)

October 13, 2015, 17:00–18:30

Room MS 001

Macroeconomics Seminar

Abstract

How do capital flows and exchange rate dynamics shape the adjustment of the global economy in a liquidity trap? We analyze this question in a model with nominal rigidities featuring two regions: North and South. When the North is pushed to the zero bound on interest rates, downstream capital flows alleviate the recession by reallocating demand to the South and switching expenditure toward North goods. Free capital flows, however, do not support an efficient demand reallocation. Constrained efficiency requires larger down-stream (upstream) flows during (after) the liquidity trap, relative to the free capital flow benchmark. Uncoordinated optimal capital flow management reduces capital flows, hampers global adjustment and causes efficiency losses. (joint work with Julien Bengui (Universite de Montreal))