Export shocks and the zero bound trap

Abstract

When a small open economy experiences a sufficiently large negative export shock, it is vulnerable to falling into a zero bound trap. In addition, such a shock can have very large impact on the economy compared to the case when the zero bound is not a binding constraint. This could be one possible explanation as to why a country like Japan experienced much larger drop in output than the United States during the recent financial crisis.Monetary policy ; Banks and banking, Central ; Global financial crisis ; Interest rates ; Japan