Abstract
What should a central bank do when faced with a weak aggregate demand even after reducing the short-term nominal interest rate to zero? To address this question, we solve a central bank's intertemporal loss-minimization problem, in which the non-negativity constraint on nominal interest rates is explicitly considered. We find that the optimal path is characterized by policy inertia, in the sense that a zero interest rate policy should be continued for a while even after the natural rate of interest returns to a positive level. By making such a commitment, the central bank is able to achieve higher expected inflation, lower long-term nominal interest rates, and a weaker domestic currency in the adverse periods when the natural rate of interest significantly deviates from a steady-state level.
| Original language | English |
|---|---|
| Pages (from-to) | 813-835 |
| Number of pages | 23 |
| Journal | Journal of Money, Credit and Banking |
| Volume | 37 |
| Issue number | 5 |
| DOIs | |
| Publication status | Published - 2005 Oct |
| Externally published | Yes |
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Keywords
- Liquidity trap
- Monetary policy inertia
- The zero bound on nominal interest rates
- Zero interest rate policy
ASJC Scopus subject areas
- Finance
- Accounting
- Economics and Econometrics
Cite this
Optimal monetary policy at the zero-interest-rate bound. / Jung, Taehun; Teranishi, Yuuki; Watanabe, Tsutomu.
In: Journal of Money, Credit and Banking, Vol. 37, No. 5, 10.2005, p. 813-835.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Optimal monetary policy at the zero-interest-rate bound
AU - Jung, Taehun
AU - Teranishi, Yuuki
AU - Watanabe, Tsutomu
PY - 2005/10
Y1 - 2005/10
N2 - What should a central bank do when faced with a weak aggregate demand even after reducing the short-term nominal interest rate to zero? To address this question, we solve a central bank's intertemporal loss-minimization problem, in which the non-negativity constraint on nominal interest rates is explicitly considered. We find that the optimal path is characterized by policy inertia, in the sense that a zero interest rate policy should be continued for a while even after the natural rate of interest returns to a positive level. By making such a commitment, the central bank is able to achieve higher expected inflation, lower long-term nominal interest rates, and a weaker domestic currency in the adverse periods when the natural rate of interest significantly deviates from a steady-state level.
AB - What should a central bank do when faced with a weak aggregate demand even after reducing the short-term nominal interest rate to zero? To address this question, we solve a central bank's intertemporal loss-minimization problem, in which the non-negativity constraint on nominal interest rates is explicitly considered. We find that the optimal path is characterized by policy inertia, in the sense that a zero interest rate policy should be continued for a while even after the natural rate of interest returns to a positive level. By making such a commitment, the central bank is able to achieve higher expected inflation, lower long-term nominal interest rates, and a weaker domestic currency in the adverse periods when the natural rate of interest significantly deviates from a steady-state level.
KW - Liquidity trap
KW - Monetary policy inertia
KW - The zero bound on nominal interest rates
KW - Zero interest rate policy
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UR - http://www.scopus.com/inward/citedby.url?scp=25644449569&partnerID=8YFLogxK
U2 - 10.1353/mcb.2005.0053
DO - 10.1353/mcb.2005.0053
M3 - Article
VL - 37
SP - 813
EP - 835
JO - Journal of Money, Credit and Banking
JF - Journal of Money, Credit and Banking
SN - 0022-2879
IS - 5
ER -