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

See all articles by Michal Brzoza-Brzezina

Michal Brzoza-Brzezina

National Bank of Poland; Warsaw School of Economics (SGH)

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

Brzoza-Brzezina, Michal, Why May Large Economies Suffer More at the Zero Lower Bound? (January 13, 2016). National Bank of Poland Working Paper No. 230, Available at SSRN: https://ssrn.com/abstract=2804952 or http://dx.doi.org/10.2139/ssrn.2804952

Michal Brzoza-Brzezina (Contact Author)

National Bank of Poland ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH)

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

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