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Taylor-Rule Exit Policies for the Zero Lower Bound

Author

Listed:
  • Siddartha Chattopadhyay

    (Indian Institute of Technology Kharagpur)

  • Betty C. Daniel

    (University at Albany - SUNY)

Abstract

The monetary authority loses the ability to implement the Taylor rule at the zero lower bound. However, the promise to implement a Taylor rule upon exit remains an effective policy instrument.We show that a Taylor rule, with an optimally chosen exit date and time-varying inflation target, delivers fully optimal policy at the zero lower bound. Additionally, a Taylor rule with only an optimally chosen exit date but a zero inflation target delivers almost all the welfare gains of optimal policy and is simpler to communicate.

Suggested Citation

  • Siddartha Chattopadhyay & Betty C. Daniel, 2018. "Taylor-Rule Exit Policies for the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 1-53, December.
  • Handle: RePEc:ijc:ijcjou:y:2018:q:4:a:1
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    Cited by:

    1. Dufrénot, Gilles & Khayat, Guillaume A., 2017. "Monetary Policy Switching In The Euro Area And Multiple Steady States: An Empirical Investigation," Macroeconomic Dynamics, Cambridge University Press, vol. 21(5), pages 1175-1188, July.
    2. Siddhartha Chattopadhyay & Taniya Ghosh, 2016. "Cost channel, interest rate pass-through and optimal monetary policy under zero lower bound," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2016-012, Indira Gandhi Institute of Development Research, Mumbai, India.
    3. Chattopadhyay, Siddhartha & Ghosh, Taniya, 2016. "Cost Channel, Interest Rate Pass-Through and Optimal Policy under Zero Lower Bound," MPRA Paper 72762, University Library of Munich, Germany.
    4. Chattopadhyay, Siddhartha & Ghosh, Taniya, 2020. "Taylor Rule implementation of the optimal policy at the zero lower bound: Does the cost channel matter?," Economic Modelling, Elsevier, vol. 89(C), pages 351-366.
    5. Chattopadhyay, Siddhartha, 2020. "Forward guidance and quantitative easing at the Zero Lower Bound," Economics Letters, Elsevier, vol. 197(C).
    6. Siddhartha Chattopadhyay, 2016. "Cost Channel, Interest Rate Pass-Through and Optimal Monetary Policy under Zero Lower Bound," Working Papers id:11075, eSocialSciences.
    7. Chattopadhyay, Siddhartha, 2019. "The Neo-Fisherianism to Escape Zero Lower Bound," MPRA Paper 92669, University Library of Munich, Germany.

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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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