Thursday, November 1, 2018

Global Thrift Paradox

LUCA FORNARO, Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI), Barcelona Graduate School of Economics (Barcelona GSE)
LUISS Guido Carli University
This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy cannot stabilize the economy because it is frequently constrained by the zero lower bound. Now imagine that governments complement monetary policy with prudential financial and fiscal policies, because they perceive that limiting private and public borrowing during booms will help stabilize the economy by reducing the risk of financial crises and by creating space for fiscal interventions during busts. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In a financially integrated world, in fact, prudential policies generate a rise in the global supply of savings, or equivalently a drop in global aggregate demand. In turn, weaker global aggregate demand depresses output in countries whose monetary policy is constrained by the zero lower bound. Due to this effect, the world might paradoxically experience a fall in output and welfare following the implementation of well-intended prudential policies.

1 comment:

  1. Withdraw bitcoin from blockchain is our company who support you to withdraw (remove) your bitcoins from your BLOCKCHAIN WALLET and get it transferred to PAYPAL account. You will be curious right now to know that how your bitcoins will be sent to PAYPAL account as they don not accept bitcoins.