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The Paradox of Global Thrift

Author

Listed:
  • Luca Fornaro

    (CREI and Universitat Pompeu Fabra)

Abstract
This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is frequently constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies, aiming at increasing national savings in good times to sustain aggregate demand and employment during busts. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. The reason is that prudential policies by booming countries generate a rise in the global supply of savings or, equivalently, a fall in global aggregate demand. In turn, weaker global aggregate demand exacerbates the recession in countries currently stuck in a liquidity trap. Therefore, paradoxically, the world might very well experience a fall in employment and output following the implementation of prudential policies.

Suggested Citation

  • Luca Fornaro, 2018. "The Paradox of Global Thrift," 2018 Meeting Papers 209, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:209
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    References listed on IDEAS

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    Cited by:

    1. Xing Guo & Pablo Ottonello & Diego J. Perez, 2023. "Monetary Policy and Redistribution in Open Economies," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(1), pages 191-241.
    2. Corsetti, Giancarlo & Mavroeidi, Eleonora & Thwaites, Gregory & Wolf, Martin, 2019. "Step away from the zero lower bound: Small open economies in a world of secular stagnation," Journal of International Economics, Elsevier, vol. 116(C), pages 88-102.
    3. Acharya, Sushant & Bengui, Julien, 2018. "Liquidity traps, capital flows," Journal of International Economics, Elsevier, vol. 114(C), pages 276-298.
    4. Cavallino, Paolo & Sandri, Damiano, 2023. "The open-economy ELB: Contractionary monetary easing and the trilemma," Journal of International Economics, Elsevier, vol. 140(C).
    5. Robert Kollmann, 2021. "Liquidity traps in a monetary union," Oxford Economic Papers, Oxford University Press, vol. 73(4), pages 1581-1603.
    6. Romei, Federica & de Ferra, Sergio, 2018. "Sovereign Default in a Monetary Union," CEPR Discussion Papers 12976, C.E.P.R. Discussion Papers.
    7. Kollmann, Robert, 2021. "Liquidity traps in a world economy," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    8. Martin Wolf, 2018. "Optimal Prudential Policy in Economies with Downward Wage Rigidity," Vienna Economics Papers vie1804, University of Vienna, Department of Economics.
    9. Pierre Olivier Gourinchas, 2023. "International Macroeconomics: From the Great Financial Crisis to COVID-19, and Beyond," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(1), pages 1-34, March.
    10. Gianluca Benigno & Luca Fornaro & Martin Wolf, 2019. "The global financial resource curse," Economics Working Papers 1803, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2023.
    11. Luca Fornaro & Federica Romei, 2022. "Monetary policy during unbalanced global recoveries," Economics Working Papers 1814, Department of Economics and Business, Universitat Pompeu Fabra.
    12. Wolf, Martin, 2020. "Pecuniary externalities in economies with downward wage rigidity," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 219-235.
    13. Ahmed, Rashad, 2023. "Global commodity prices and macroeconomic fluctuations in a low interest rate environment," Energy Economics, Elsevier, vol. 127(PB).
    14. Luca Fornaro & Federica Romei, 2022. "Monetary Policy in an Unbalanced Global Economy," Working Papers 1313, Barcelona School of Economics.
    15. Bengui, Julien & Bianchi, Javier, 2022. "Macroprudential policy with leakages," Journal of International Economics, Elsevier, vol. 139(C).
    16. Monnet, Eric & Degorce, Victor, 2020. "The Great Depression as a Saving Glut," CEPR Discussion Papers 15287, C.E.P.R. Discussion Papers.
    17. Martin Wolf, 2018. "Optimal Prudential Policy in Economies with Downward Wage Rigidity," Vienna Economics Papers 1804, University of Vienna, Department of Economics.
    18. Wolf, Martin, 2020. "Pecuniary externalities in economies with downward wage rigidity," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 219-235.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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