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American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

The Paradox of Global Thrift

  • Luca Fornaro
  • Federica Romei
American Economic Review
vol. 109, no. 11, November 2019
(pp. 3745–79)
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Abstract

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, noncooperative financial and fiscal policies might lead to a fall in global output and welfare.

Citation

Fornaro, Luca, and Federica Romei. 2019. "The Paradox of Global Thrift." American Economic Review, 109 (11): 3745–79. DOI: 10.1257/aer.20180608

Additional Materials

JEL Classification

  • E21 Macroeconomics: Consumption; Saving; Wealth
  • E23 Macroeconomics: Production
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E44 Financial Markets and the Macroeconomy
  • E52 Monetary Policy
  • E62 Fiscal Policy
  • F32 Current Account Adjustment; Short-term Capital Movements