scholarly journals An Interest Rate Rule to Uniquely Implement the Optimal Equilibrium in a Liquidity Trap

2015 ◽  
Author(s):  
Fernando Duarte ◽  
Anna Zabai
Keyword(s):  
Interest Rate ◽  
Liquidity Trap ◽  
Interest Rate Rule

scholarly journals The Case for Open-Market Purchases in a Liquidity Trap

2005 ◽  
Vol 95 (1) ◽  
pp. 110-137 ◽  
Author(s):  
Alan J Auerbach ◽  
Maurice Obstfeld
Keyword(s):  
Interest Rate ◽  
Large Scale ◽  
Open Market ◽  
Macroeconomic Stabilization ◽  
Short Term ◽  
Liquidity Trap ◽  
Welfare Impact ◽  
Dynamic General Equilibrium Model ◽  
Policy Tool ◽  
Economic Experience

Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. We show that even were this the case, there remains a powerful argument for large-scale open market operations as a fiscal policy tool. As we also demonstrate, however, this same reasoning implies that open-market operations will be beneficial for stabilization as well, even when the economy is expected to remain mired in a liquidity trap for some time. Thus, the microeconomic fiscal benefits of open-market operations in a liquidity trap go hand in hand with standard macroeconomic objectives. Motivated by Japan’s recent economic experience, we use a dynamic general-equilibrium model to assess the welfare impact of open-market operations for an economy in Japan’s predicament. We argue Japan can achieve a substantial welfare improvement through large open-market purchases of domestic government debt.

scholarly journals The Unpleasant Arithmetic of the Taylor Rule

2020 ◽  
Vol 8 (3) ◽  
pp. p89
Author(s):  
Alejandro Rodriguez-Arana
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Phillips Curve ◽  
Taylor Rule ◽  
Independent Component ◽  
Elasticity Of Substitution ◽  
Interest Rate Rule

This paper analyzes the effect of a monetary policy that raises the reference interest rate in order to reduce inflation in a situation where the fiscal policy parameters remain constant. In an overlapping generation’s model and in the presence of an accelerationist Phillips curve and a Taylor rule of interest rates, it is observed that increasing the independent component of said rule leads to a solution that at least in a large number of cases is unstable. In the case where the elasticity of substitution is greater than one, inflation falls temporarily, but then it can increase in an unstable manner. One way to achieve stability is to establish an interest rate rule where Taylor’s principle is not met. However, in this case many times the increase in the independent component of this rule will generate greater long-term inflation.

scholarly journals On the Welfare Cost of Inflation and the Recent Behavior of Money Demand

2009 ◽  
Vol 99 (3) ◽  
pp. 1040-1052 ◽  
Author(s):  
Peter N Ireland
Keyword(s):  
Interest Rate ◽  
Money Demand ◽  
Demand Curve ◽  
Nominal Interest Rate ◽  
Welfare Cost Of Inflation ◽  
Friedman Rule ◽  
Long Run ◽  
Income Ratio ◽  
Interest Rate Rule ◽  
Relationship Of

Post-1980 US data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semielasticity below 2. Integrating under this money demand curve yields estimates of the welfare costs of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule. (JEL E31, E41, E52)

scholarly journals A Neowicksellian in a New Classical World: The Methodology of Michael Woodford's Interest and Prices

2006 ◽  
Vol 28 (2) ◽  
pp. 143-149 ◽  
Author(s):  
Kevin D. Hoover
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Markets ◽  
Interest Rates ◽  
Theoretical Orientation ◽  
Central Banks ◽  
Point Of View ◽  
Monetary Aggregates ◽  
Classical World ◽  
Interest Rate Rule

Michael Woodford's Interest and Prices: Foundations of a Theory of Monetary Policy (2003) is an important book. Woodford's title is, of course, a conscious revival of Wicksell's own famous work and it points to an effort to recast the analysis of monetary policy as centered on interest rates. I believe that Woodford's theoretical orientation is essentially correct. In repairing to Wicksell, he places the monetary aggregates into a more reasonable perspective, correcting the distortions of the monetarist and Keynesian diversions with respect to money. My money is, so to speak, where my mouth is: My own textbook-in-progress is also based around an IS/interest-rate rule/AS model, in which financial markets cleared by price rather than the LM curve are emphasized. Such an approach, as Woodford notes, has become standard in central banks, but has not yet captured either core undergraduate or graduate textbooks and instruction. My task here, however, was not to praise Woodford's economics nor to trace or evaluate its Wicksellian routes, but to consider Interest and Prices from a methodological point of view.

scholarly journals Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap

2013 ◽  
Vol 5 (3) ◽  
pp. 190-228 ◽  
Author(s):  
David Cook ◽  
Michael B Devereux
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Optimal Policy ◽  
Liquidity Trap ◽  
Relative Prices ◽  
Policy Responses ◽  
Global Liquidity ◽  
Initial Shock ◽  
Monetary And Fiscal Policy ◽  
Zero Bound

This paper analyzes optimal policy responses to a global liquidity trap. The key feature of this environment is that relative prices respond perversely. A fall in demand in one country causes an appreciation of its terms of trade, exacerbating the initial shock. At the zero bound, this country cannot counter this shock. Then it may be optimal for the partner country to raise interest rates. The partner may set a positive policy interest rate, even though its “natural interest rate” is below zero. An optimal policy response requires a mutual interaction between monetary and fiscal policy. (JEL E12, E32, E44, E52, E62, F44, G01)

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