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Managing Monetary Policy Normalization

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  • Benigno, Pierpaolo
  • Benigno, Gianluca

Abstract

We propose a new framework for monetary policy analysis to study monetary policy normalization when exiting a liquidity trap. The optimal combination of reserves and interest rate policy requires an increase in liquidity (reserves) a few quarters after the policy rate is set at the effective lower bound. Removal of accommodation requires that quantitative tightening starts before the liftoff of the policy rate. Moreover, the withdrawal of liquidity takes place at a very slow pace relative to the normalization of the policy rate.

Suggested Citation

  • Benigno, Pierpaolo & Benigno, Gianluca, 2022. "Managing Monetary Policy Normalization," CEPR Discussion Papers 17290, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17290
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    Cited by:

    1. Pierpaolo Benigno, 2023. "The International Supply of Reserve Currency," Diskussionsschriften dp2313, Universitaet Bern, Departement Volkswirtschaft.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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