Zero Bound on Interest Rates and Optimal Monetary Policy
By Gauti B. Eggertsson, Michael Woodford. Brookings Papers on Economic Activity, 2003
2,148 citations recorded by the source corpus.
This paper considers the consequences for monetary policy of the zero floor for nominal interest rates. The zero bound can be a significant constraint on the ability of a central bank to combat deflation. The paper shows, in the context of an intertemporal equilibrium model, that open-market operations, even of "unconventional" types, are ineffective if future policy is expected to be purely forward looking. However, a credible commitment to the right sort of history-dependent policy can largely mitigate the distortions created by the zero bound. In the model, optimal policy involves a commitment to adjust interest rates so as to achieve a time-varying price-level target, when this is consistent with the zero bound. The paper also discusses ways in which other central bank actions, although irrelevant apart from their effects on expectations, may help to make a central bank's commitment to its target more credible.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/69a44383df9233e4ba710b10642de92c7193e06c
How researchers see this paper
The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.
In Economics and Econometrics
- C. Walsh
- Michael Woodford
- C. Borio
- V. Ramey
- Frederic S. Mishkin
- Jón Steinsson
- Emi Nakamura
- Y. Gorodnichenko
In Finance
- C. Walsh
- C. Borio
- Frederic S. Mishkin
- Andrew T. Levin
- Ben S. Bernanke
- Emmanuel Farhi
- Michael Woodford
- I. Werning
Citations in the corpus
- Nonlinear Adventures at the Zero Lower Bound (2012, background): “These effects are consequential for the conduct of policy as illustrated, for instance, by Eggertsson and Woodford (2003)– for monetary policy– and Christiano, Eichenbaum, and Rebelo (2011)– for fiscal policy.”
- Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence (2015, background): “For this exercise, instead of focusing only on those households who are interviewed once, we now restrict attention to those households that are interviewed twice.(9) This leaves us with roughly 50,000 observations.”
- QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool (2013, background): “As equations (12) and (13) suggest, if private intermediation is balance sheet constrained, excess returns on assets arise.”
- Policy Options in a Liquidity Trap (2004, background): “I. Ineffectiveness of Open-Market Operations In a recent paper (Eggertsson and Woodford, 2003), we analyze the effects of open-market operations once the zero bound has been reached, in a representative-household optimizing model of the monetary transmission mechanism with monopolistic competition…”
- Understanding the Gains from Wage Flexibility: The Exchange Rate Connection (2016, neutral): “…the limited (or even perverse) response of the interest rate to a disin ationary shock due to the exchange rate stability concerns emphasized here and that resulting from the zero lower bound (ZLB) constraint on the nominal interest rate becoming e¤ective (see, e.g. Eggertsson and Woodford (2003)).”
- Necessity As the Mother of Invention: Monetary Policy after the Crisis (2017, background): “Academic theories often translate FG into true commitment on behalf of the central bank (cf. Eggertsson and Woodford, 2003).”