Why May Large Economies Suffer More at the Zero Lower Bound?
National Bank of Poland Working Paper No. 230
23 Pages Posted: 7 Jul 2016
Date Written: January 13, 2016
Abstract
This paper compares the consequences of hitting the zero lower bound in small open and large closed economies. I construct a two-economy New Kenynesian model and calibrate it so that one economy is small and open and the second large and closed. Then I conduct a number of experiments assuming that the zero lower bound binds for one or the other economy. At the ZLB bad shocks are amplified and good shocks dampened. I show that this modifications are much stronger in the large than in the small economy. As a result the large economy may suffer more at the ZLB.
Keywords: zero lower bound, small open economy, amplification of shocks
JEL Classification: E43, E52
Suggested Citation: Suggested Citation