Chapter 10 International Transfer under Stagnation

Using a two-country two-commodity dynamic optimization model that gives rise to a liquidity trap, this paper investigates the effect of an international transfer on consumption and employment in the donor and recipient countries. It shows that a transfer from a country with unemployment to a country with full employment raises both countries' consumption. It deteriorates the donor's current account and hence depreciates its currency, which improves the international competitiveness of its products. Thus, employment and consumption increases in the country. It in turn improves the terms of trade for the recipient country, which benefits it since it maintains full employment.