The Paradox of Global Thrift
- American Economic Review (Forthcoming)
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 backfire 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 financial and fiscal policies might lead to a fall in global output and welfare.
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