We develop a two-country business-cycle model of the US and the rest of the world with dollar dominance in trade invoicing, in cross-border credit, and in safe assets. The interplay between these elements—dollar trinity—rationalizes salient features of the Global Financial Cycle in the data: When its tide subsides, the dollar appreciates, financial conditions tighten, the world business cycle slows ...
How does a monetary union alter the impact of business cycle shocks at the household level? We develop a Heterogeneous Agent New Keynesian model of two countries (HANK2) and show in closed form that a monetary union shifts the adjustment to a shock horizontally—across countries—within the brackets of the union-wide wealth distribution rather than vertically—that is, across the brackets of the union-wide ...
Negative policy rates can convince markets that deposit rates will remain lower-for-longer, even when current deposit rates are constrained by zero. This is the signalling channel of negative interest rates. We analyse the optimality and effectiveness of negative rates in the context of this novel transmission channel. In a stylized model, we prove two necessary conditions for optimality: time-consistency ...
Marcel Fratzscher, President of the German Institute for Economic Research (DIW Berlin), comments on the results of today’s meeting of the European Central Bank (ECB):
