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Optimal monetary policy mix at the zero lower bound

Author

Listed:
  • Bonciani, Dario

    (Bank of England)

  • Oh, Joonseok

    (Freie Universität Berlin)

Abstract

Long-term asset purchases carried out by central banks increase the consumption volatility of households holding long-term debt. For this reason, monetary authorities should not just aim at stabilising inflation and the output gap but also mitigate the volatility of their balance sheet. In response to negative demand shocks at the zero lower bound (ZLB), the optimal monetary policy consists of a mix of forward guidance and mild adjustments in the balance sheet. The presence of balance-sheet policies reduces the optimal ZLB duration and significantly improves social welfare. Mitigating the effectiveness of forward guidance calls for a more substantial balance-sheet expansion and a shorter ZLB duration. If a central bank only aims to stabilise inflation and the output gap, welfare losses are significantly larger than under the optimal policy and balance-sheet policies only improve welfare if the weight on output-gap stabilisation is relatively large. Last, simple implementable policy rules can achieve welfare outcomes close to those under the optimal policy.

Suggested Citation

  • Bonciani, Dario & Oh, Joonseok, 2021. "Optimal monetary policy mix at the zero lower bound," Bank of England working papers 945, Bank of England.
    • Handle: RePEc:boe:boeewp:0945
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    References listed on IDEAS

    as
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    Cited by:

    1. Andrejs Zlobins, 2022. "Into the Universe of Unconventional Monetary Policy: State-dependence, Interaction and Complementarities," Working Papers 2022/05, Latvijas Banka.
    2. Oliver Pfäuti & Fabian Seyrich, 2022. "A Behavioral Heterogeneous Agent New Keynesian Model," CRC TR 224 Discussion Paper Series crctr224_2022_334, University of Bonn and University of Mannheim, Germany.
    3. Salvatore Nisticò & Marialaura Seccareccia, 2022. "Unconventional Policy and Idiosyncratic Risk," Working Papers 7/22, Sapienza University of Rome, DISS.

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    More about this item

    Keywords

    Optimal monetary policy; unconventional monetary policy; quantitative easing; forward guidance;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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