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Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank Author info | Abstract | Publisher info | Download info | Related research | Statistics Olivier Jeanne
Lars E. O. Svensson
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Central banks target CPI inflation; independent central banks are concerned about their balance sheet and the level of their capital. The first fact makes it difficult for a central bank to implement the optimal escape from a liquidity trap, because it undermines a commitment to overshoot the inflation target. We show that the second fact provides a solution. Capital concerns provide a mechanism for an independent central bank to commit to inflate ex post. The optimal policy can take the form of a currency depreciation combined with a crawling peg, a policy advocated by Svensson as the "Foolproof Way" to escape from a liquidity trap. (JEL E31, E52, E58, E62)
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Article provided by American Economic Association in its journal American Economic Review .
Volume (Year): 97 (2007)
Issue (Month): 1 (March)
Pages: 474-490
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Handle: RePEc:aea:aecrev:v:97:y:2007:i:1:p:474-490Contact details of provider: Email: Web page: http://www.aeaweb.org/aer/ More information through EDIRC
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Paper Olivier Jeanne & Lars E.O. Svensson, 2004.
"Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank ,"
NBER Working Papers
10679, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted) Jeanne, Olivier & Svensson, Lars E O, 2004.
"Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank ,"
CEPR Discussion Papers
4599, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted) Olivier Jeanne & Lars E. O. Svensson, 2004.
"Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank ,"
IMF Working Papers
04/162, International Monetary Fund.
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Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000.
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2529, C.E.P.R. Discussion Papers.
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Auerbach, Alan J & Obstfeld, Maurice, 2004.
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CEPR Discussion Papers
4447, C.E.P.R. Discussion Papers.
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Center for International and Development Economics Research, Working Paper Series
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"The case for open-market purchases in a liquidity trap ,"
Proceedings ,
Federal Reserve Bank of San Francisco, issue Mar.
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American Economic Review ,
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Lars E. O. Svensson, 2003.
"Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others ,"
Journal of Economic Perspectives ,
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references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
Gauti B. Eggertsson, 2005.
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Klaus Adam & Roberto Billi, 2005.
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CFS Working Paper Series
2005/16, Center for Financial Studies.
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"Issues in Central Bank Finance and Independence ,"
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08/37, International Monetary Fund.
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