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Optimal monetary policy rules in a two-country economy with a zero bound on nominal interest rates

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  • Ida, Daisuke

Abstract

This paper investigates optimal monetary policy rules when two large countries simultaneously face non-negativity constraints on nominal interest rates. Under policy coordination, domestic optimal monetary policy rules depend on domestic endogenous variables, foreign inflation, and domestic and foreign policy rates when the zero lower bound is never binding. Such policy rules generally lose the optimality once both countries face the zero bound simultaneously. We demonstrate that even in such a situation the domestic central bank can obtain an optimal interest rate rule that retains the history dependence from endogenous variables such as inflation and the output gap of both countries.

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  • Ida, Daisuke, 2013. "Optimal monetary policy rules in a two-country economy with a zero bound on nominal interest rates," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 223-242.
  • Handle: RePEc:eee:ecofin:v:24:y:2013:i:c:p:223-242
    DOI: 10.1016/j.najef.2012.10.006
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    Cited by:

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    2. Daisuke Ida & Hirokuni Iiboshi, 2021. "The interaction of forward guidance in a two-country new Keynesian model," Papers 2103.12503, arXiv.org, revised Apr 2021.
    3. Hasui, Kohei, 2013. "The non-negative constraint on the nominal interest rate and the effects of monetary policy," MPRA Paper 49394, University Library of Munich, Germany.
    4. Yutaka Kurihara, 2017. "Are Unconventional Monetary Policy and Large Scale Fiscal Policy Effective?: The Case of Japan," Applied Finance and Accounting, Redfame publishing, vol. 3(2), pages 42-48, August.

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    More about this item

    Keywords

    Optimal monetary policy rule; Zero lower bound; Policy coordination; History dependence;
    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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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