Discussion of “The Zero Lower Bound and Monetary Policy in a Global Economy: A Simple Analytical Investigation”∗

This is an original, intriguing, and timely paper. Its direct motivation stems from the unprecedented global policy response to the 2007–08 financial crisis. To a large extent, monetary policymakers worldwide have been recently sailing in uncharted waters. Interest rates in several countries have been slashed to exceptionally low levels, and at the time of this writing they are expected to stay near the zero bound for quite a while. At the same time, a multifaceted debate on exit strategies is raising issues regarding timing and speed of interest rate normalization (as well as the dynamics of quantitative easing and asset purchase programs, and the optimal size and composition of central bank balance sheets). Our understanding of cross-country policy spillovers when a generalized liquidity trap affects several trading partners simultaneously is limited at best. In this context this paper is very welcome, as it sheds some light on the interdependencies that arise in a world economy where the monetary stance in a country or regional bloc may affect domestic conditions elsewhere. Specifically, the paper focuses on the following scenario: (i) all countries are initially in a liquidity trap (the zero interest floor is binding); (ii) the conduct of their monetary policies is designed in a cooperative fashion, either discretionally or under commitment; and (iii) exit from the liquidity trap is anticipated to be asymmetric (some countries are expected to leave the zero interest rate policy earlier than others).