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Quantitative and credit easing policies at the zero lower bound on the nominal interest rate

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  • Dai, Meixing

Abstract

Using a New-Keynesian model extended to include credit, money and reserve markets, we examine the dynamics of inflation and output gap under some monetary policy options adopted when the economy is hit by large negative real, financial and monetary shocks. Relaxing the assumption that market interest rates are perfectly controlled by the central bank using the funds rate operating procedure, we have shown that the equilibrium at the zero lower bound on the nominal discount rate is stable (or cyclically stable, depending on monetary and financial parameters) and constitutes a liquidity trap, making the central bank’s communication skills useless in the crisis management. While the quantitative easing policy allows attenuating the effects of crisis, it is not always sufficient to restore the normal equilibrium. Nevertheless, quantitative and credit easing policies coupled with the zero discount rate policy could stabilize the economy and make central bank’s communication potentially credible during the crisis.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28129.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:28129

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Keywords: Zero lower bound (ZLB) on the nominal interest rate; zero interest rate policy; liquidity trap; quantitative easing policy; credit easing policy; dynamic stability.;

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