What the study found
The study finds that shocks affecting the supply or demand of assets have very different international spillovers for an economy in a liquidity trap, where interest rates are constrained near zero. It also finds that a decrease in the supply of assets issued abroad can create an asset shortage domestically.
Why the authors say this matters
The authors conclude that, because the model includes a demand for liquidity and the supply of bonds matters, asset-market shocks can transmit across countries in ways that depend on whether an economy is in normal times or a liquidity trap. The study suggests that these spillovers may affect whether the economy experiences deflation, currency appreciation, or recession.
What the researchers tested
The researchers built a two-country heterogenous-agent non-Ricardian model with asset scarcity and financial frictions in international capital markets. In this framework, non-Ricardian means households do not fully offset government borrowing with private saving, so a demand for liquidity emerges and the supply of bonds matters.
What worked and what didn't
According to the abstract, when the supply of assets issued abroad falls, the domestic economy faces an asset shortage. In normal times, the nominal interest rate decreases, which stimulates investment and output; in a liquidity trap, deflation occurs instead and the currency appreciates, which may cause a recession.
What to keep in mind
The abstract does not describe empirical data, and the summary provided here is limited to the model and results stated in the abstract. No further limitations are described in the available summary.
Key points
- The model links asset-market shocks to international spillovers in a two-country economy.
- A fall in assets issued abroad can create a domestic asset shortage.
- In normal times, that shock lowers nominal interest rates and stimulates investment and output.
- In a liquidity trap, the same shock leads to deflation and currency appreciation, which may cause a recession.
- The framework includes asset scarcity, financial frictions, and a demand for liquidity.
Disclosure
- Research title:
- Liquidity-trap spillovers differ sharply across asset-supply shocks
- Authors:
- Philippe Bacchetta, Kenza Benhima, Yannick Kalantzis, Maxime Phillot
- Institutions:
- Centre for Economic Policy Research, University of Lausanne, Banque de France, Swiss National Bank
- Publication date:
- 2026-02-24
- OpenAlex record:
- View
Get the weekly research newsletter
Stay current with peer-reviewed research without reading academic papers — one filtered digest, every Friday.