Gradualism and Liquidity Traps

Konferenzbeitrag

Modifying the mandate of a discretionary central bank to include an interest-rate smoothing objective increases the welfare of an economy where large contractionary shocks occasionally force the central bank to lower the policy rate to its effective lower bound. The central bank with an interest-rate smoothing objective credibly keeps the policy rate low for longer than the discretionary central bank with the standard mandate does, as in optimal commitment policy. Through expectations, the temporary overheating of the economy associated with such low-for-long interest rate policy mitigates the declines in inflation and output when the lower bound constraint is binding. In a calibrated model, we find that the introduction of an interest-rate smoothing objective can reduce the welfare costs associated with the lower bound constraint by more than half.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Beiträge zur Jahrestagung des Vereins für Socialpolitik 2016: Demographischer Wandel - Session: Liquidity Traps ; No. A17-V1

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Policy Objectives; Policy Designs and Consistency; Policy Coordination ; Central Banks and Their Policies

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Schmidt, Sebastian ; Nakata, Taisuke
• Event: Veröffentlichung
• (who): ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
• (where): Kiel und Hamburg
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/145469