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Imperfect credibility and the zero lower bound

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  • Bodenstein, Martin
  • Hebden, James
  • Nunes, Ricardo

Abstract

As the nominal interest rate cannot fall below zero, a central bank with imperfect credibility faces a significant challenge to stabilize the economy in a New Keynesian model during a large recession. We characterize the optimal monetary policy at the zero lower bound for the nominal interest rate if credibility is imperfect. Confronting monetary policy communication of the U.S. Federal Reserve and the Swedish Riksbank with such a framework, the credibility of both institutions is shown to have been low in the aftermath of the 2008 economic crisis.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 2 ()
Pages: 135-149

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Handle: RePEc:eee:moneco:v:59:y:2012:i:2:p:135-149

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Web page: http://www.elsevier.com/locate/inca/505566

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Cited by:
  1. Callum Jones & Mariano Kulish, 2011. "Long-term Interest Rates, Risk Premia and Unconventional Monetary Policy," RBA Research Discussion Papers rdp2011-02, Reserve Bank of Australia.
  2. Coenen, Günter & Warne, Anders, 2013. "Risks to price stability, the zero lower bound and forward guidance: a real-time assessment," Working Paper Series 1582, European Central Bank.
  3. Julian A. Parra-Polania & Carmiña O. Vargas, 2014. "Changes in GDP’s measurement error volatility and response of the monetary policy rate: two approaches," Borradores de Economia 814, Banco de la Republica de Colombia.

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