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Working Paper
International policy spillovers at the zero lower bound
In this paper, we consider how monetary policy in a large, foreign economy affects optimal monetary policy in a small open economy (`home') in response to a large global demand shock that pushes both economies to the zero lower bound (ZLB) on nominal interest rates. We show that the inability of foreign monetary policy to stabilise the foreign economy at the ZLB creates a spillover that affects how well the home policymaker is able to stabilise its own economy. We show that more stimulatory foreign policy worsens the home policymaker's trade-off between stabilising inflation and the output ...