Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank

By Olivier Jeanne, Lars E. O. Svensson. Social Science Research Network, 2004

172 citations recorded by the source corpus.

An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson's Foolproof Way to escape from a liquidity trap.

Subfields: Economics and Econometrics, Finance, Management Information Systems

View Paper: https://www.semanticscholar.org/paper/f07ea1a38f90b22d97b6e88a41ecc6bfc4da5ddf

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

1. Gauti B. Eggertsson
2. Florin O. Bilbiie
3. Frederic S. Mishkin
4. Michael Woodford
5. I. Werning
6. C. Borio
7. Atif R. Mian
8. Thomas Philippon

In Finance

1. Gauti B. Eggertsson
2. Frederic S. Mishkin
3. Michael Woodford
4. Lars E. O. Svensson
5. J. Wieland
6. Florin O. Bilbiie
7. I. Werning
8. Alfonso Palacio-Vera

In Management Information Systems

1. Gauti B. Eggertsson

Citations in the corpus

• Discretionary monetary policy and the zero lower bound on nominal interest rates (2007, unknown): “Eggertsson (2006) and Jeanne and Svensson (2004) build upon this idea and discuss potential solutions to the credibility problem.”
• Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment (2005, unknown): “Note that the management of central bank capital so as to create a commitment not to appreciate the currency, discussed in Jeanne and Svensson (2004), is an example of a policy that changes the composition of central bank capital (see note 6). the central bank can reduce the relative supply of…”
• The Deflation Bias and Committing to Being Irresponsible (2006, background): “Eggertsson (2003) and Jeanne and Svensson (2004) suggest that a “goal independent” central bank may be able to commit to future inflation by purchasing foreign exchange reserves or real assets if it cares about balance sheet losses, but Eggertsson (2003) argues that this commitment device is not…”