The international transmission of asset market shocks in liquidity traps

We build a two-country heterogenous-agent non-Ricardian model featuring asset scarcity and financial frictions in international capital markets. Due to the non-Ricardian nature of our framework, a demand for liquidity emerges and the supply of bonds matters. We show that shocks affecting the supply or demand of assets have very different international spillovers for an economy in a liquidity trap. A decrease in the supply of assets issued abroad leads to an asset shortage domestically. In normal times, the nominal interest rate decreases, stimulating investment and output. In a liquidity trap, deflation hits instead and the currency appreciates, which may cause a recession.

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Publication Details

Journal
Journal of International Economics
Published
2026-02-24
DOI
https://doi.org/10.1016/j.jinteco.2026.104235
Primary Topic
Banking stability, regulation, efficiency
Type
article
Field-Weighted Citation Impact
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article

The international transmission of asset market shocks in liquidity traps

Yannick Kalantzis, Philippe Bacchetta, Kenza Benhima, Maxime Phillot
Journal of International Economics
Banking stability, regulation, efficiency
article

The international transmission of asset market shocks in liquidity traps

Yannick Kalantzis, Philippe Bacchetta, Kenza Benhima, Maxime Phillot
article en

Abstract

We build a two-country heterogenous-agent non-Ricardian model featuring asset scarcity and financial frictions in international capital markets. Due to the non-Ricardian nature of our framework, a demand for liquidity emerges and the supply of bonds matters. We show that shocks affecting the supply or demand of assets have very different international spillovers for an economy in a liquidity trap. A decrease in the supply of assets issued abroad leads to an asset shortage domestically. In normal times, the nominal interest rate decreases, stimulating investment and output. In a liquidity trap, deflation hits instead and the currency appreciates, which may cause a recession.

Journal of International EconomicsVol. 161
Banque de France (FR), Swiss National Bank (CH), Centre for Economic Policy Research (GB), University of Lausanne (CH)
Openalex Percentile: Top 48%
Banking stability, regulation, efficiency
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