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.
Authors
- Yannick Kalantzis
- Philippe Bacchetta (ORCID: https://orcid.org/0000-0001-9233-5040)
- Kenza Benhima
- Maxime Phillot
Institutions
- Banque de France (FR)
- Swiss National Bank (CH)
- Centre for Economic Policy Research (GB)
- University of Lausanne (CH)
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
- 0.00