2026/02/24 by Philippe Bacchetta, Kenza Benhima, Yannick Kalantzis +1 · 1 voice
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Financial Markets and Investment Strategies #Global Financial Crisis and Policies
paper · doi:10.1016/j.jinteco.2026.104235
openalex publication_date 2026/02/24 · openalex created_date 2026/02/25 · openalex updated_date 2026/07/23
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.