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Exchange-Rate Policy and the Zero Bound on Nominal Interest Rates

  • Günter Coenen
  • Volker W. Wieland

In this paper, we study the effectiveness of monetary policy in a severe recession and de?ation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylized micro-founded two-country model to check our qualitative ?ndings. We ?nd that both proposals succeed in generating in?ationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target path is not directly observable. JEL Classification: E31, E52, E58, E61

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 94 (2004)
Issue (Month): 2 (May)
Pages: 80-84

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Handle: RePEc:aea:aecrev:v:94:y:2004:i:2:p:80-84
Note: DOI: 10.1257/0002828041302226
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