Corsetti, GiancarloMavroeidi, EleonoraThwaites, GregoryWolf, Martin2018-09-272018-09-272018-05http://hdl.handle.net/10230/35527We study how small open economies can escape from deation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be inffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities' ability to rescue the economy from stagnation.application/pdfengThis is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.Small open economySecular stagnationCapital controlsOptimal policyZero lower boundinfo:eu-repo/semantics/workingPaperinfo:eu-repo/semantics/openAccess