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The Zero Bound on Interest Rates and Optimal Monetary Policy
| Content Provider | Semantic Scholar |
|---|---|
| Author | Eggertsson, G. H. |
| Copyright Year | 2003 |
| Abstract | ing from monetary frictions and the structure of government liabilities altogether—and instead consider what is the desirable conduct of interest rate policy, and what kind of commitments about this policy are desirable to make in advance. How Severe a Constraint Is the Zero Bound? We turn now to the question of how the existence of the zero bound restricts the degree to which a central bank’s stabilization objectives, with regard to both inflation and real activity, can be achieved, even under ideal policy. The discussion in the previous section established that the zero bound does represent a genuine constraint. It is not true that equilibria that cannot be achieved through a suitable interest rate policy can somehow be achieved through other means, and the zero bound does limit the set of possible equilibrium paths for prices and output, although the quantitative importance of this constraint remains to be seen. Nonetheless, we will see that it is not at all the case that a central bank can do nothing to mitigate the severity of the destabilizing impact of the zero bound. The reason is that inflation and output do not depend solely on the current level of short-term nominal interest rates, or even solely on the history of such rates up until the present (so that the current level of interest rates would be the only thing that could possibly change in response to an unanticipated disturbance). The expected character of future interest rate policy is also a critical determinant of the degree to which the central bank achieves its stabilization objectives, and this allows important scope for policy to be improved upon, even when there is little choice about the current level of short-term interest rates. In fact, the management of expectations is the key to successful monetary policy at all times, not just in those relatively unusual circumstances when the zero bound is reached. The effectiveness of monetary policy has little to do with the direct effect of changing the level of overnight interest rates, since the current cost of maintaining cash balances overnight is of fairly trivial significance for most business decisions. What actually matters is the private sector’s anticipation of the future path of short-term rates, because this determines equilibrium long-term interest rates as well as equilibrium exchange rates and other asset prices—all of which are quite relevant for many current spending decisions, and hence for optimal Gauti B. Eggertsson and Michael Woodford 165 1440-03 BPEA/Eggertsson 07/17/03 08:12 Page 165 |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://www.columbia.edu/~mw2230/BPEA.pdf |
| Alternate Webpage(s) | https://notendur.hi.is/bge1/EC542/Eggertsson-Woodford%202003.pdf |
| Alternate Webpage(s) | http://www.econ.mq.edu.au/Econ_docs/econ841_student_presentations/Eggertsson_Woodford2003Ding.pdf |
| Alternate Webpage(s) | http://cep.lse.ac.uk/seminarpapers/06-05-03-WOO.pdf |
| Alternate Webpage(s) | http://econ.lse.ac.uk/staff/vassilis/seminars/papers/mcrw-060503.pdf |
| Alternate Webpage(s) | http://www.jonathanbenchimol.com/data/teaching/boi-macro/Lecture1-Woodford.pdf |
| Alternate Webpage(s) | http://www.princeton.edu/~woodford/BPEA.pdf |
| Alternate Webpage(s) | https://www.federalreserve.gov/events/conferences/irfmp2003/pdf/Eggertsson.pdf |
| Alternate Webpage(s) | http://muse.jhu.edu/journals/brookings_papers_on_economic_activity/v2003/2003.1eggertsson.pdf |
| Language | English |
| Access Restriction | Open |
| Subject Keyword | Arabic numeral 0 Economic Inflation Kind of quantity - Equilibrium Money |
| Content Type | Text |
| Resource Type | Article |
