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Monetary Policy and Financial Markets at the Effective Lower Bound

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  • LARS E.O. SVENSSON

Abstract

I discuss what determines the effective lower bound (ELB) for the policy rate and argue that the ELB is not hard, but rather soft, and that it is probably slightly negative. I argue that, at the ELB, current output can be increased by (i) monetary policy that extends the period of credibly low policy rates and generates inflation expectations, (ii) financial-stability policy-which is distinct from monetary policy-that reduces the spreads between market interest rates and the policy rate, and (iii) fiscal policy that increases the neutral real rate by reducing expected growth of government expenditure and increases potential output by increasing current government expenditure. Copyright (c) 2010 The Ohio State University.

Suggested Citation

  • Lars E.O. Svensson, 2010. "Monetary Policy and Financial Markets at the Effective Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 229-242, September.
  • Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:s1:p:229-242
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    Cited by:

    1. baaziz, yosra, 2016. "Les règles de Taylor à l’épreuve de la révolution : cas de l’Égypte
      [The Taylor rule to the test of the revolution: the case of Egypt]
      ," MPRA Paper 69779, University Library of Munich, Germany.
    2. repec:pal:assmgt:v:18:y:2017:i:2:d:10.1057_s41260-016-0009-4 is not listed on IDEAS
    3. Lars E.O. Svensson, 2017. "What Rule for the Federal Reserve? Forecast Targeting," NBER Working Papers 23993, National Bureau of Economic Research, Inc.

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