IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this book chapter or follow this series

A Monetary Policy Rule for Automatic Prevention of a Liquidity Trap

In: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15

Author Info

  • Bennett T. McCallum

Abstract

In analyses of "liquidity trap" problems associated with the zero lower bound (ZLB) on nominal interest rates, it is important to emphasize the difference between policy rule changes, intended to help escape an existing ZLB situation, and maintained policy rules designed so as to avoid ZLB situations. Analysis assuming that rule changes would lead to a new RE equilibrium immediately seems implausible. Accordingly, the paper focuses on the design of a rule that should retain stabilization effectiveness even if the economy is temporarily shocked into a ZLB situation. The rule considered is one that uses as its instrument variable a weighted average of an interest rate and the rate of depreciation of the nominal exchange rate. With a small weight attached to the depreciation term, it will be nearly irrelevant in normal situations but call for strong adjustments when the ZLB condition prevails. Stabilizing properties of this "MC" rule are studied within a small open economy model developed by McCallum and Nelson. Results indicate that under ZLB conditions the MC rule will provide strong stabilizing policy actions yet, under conditions such that the ZLB constraint is not relevant, the MC rule need not hinder monetary policy.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/chapters/c0088.pdf
Download Restriction: no

as
in new window

This chapter was published in:
  • Takatoshi Ito & Andrew K. Rose, 2006. "Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15," NBER Books, National Bureau of Economic Research, Inc, number ito_06-1, October.
    • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0088.
    Handle: RePEc:nbr:nberch:0088
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.orgEmail:


    More information through EDIRC

    Keywords:

    Other versions of this item:

    Find related papers by JEL classification:
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
    2. Auerbach, Alan J. & Obstfeld, Maurice, 2012. "The Case for Open-Market Purchases in a Liquidity Trap," Center for International and Development Economics Research, Working Paper Series qt4tm5h0s3, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    3. Jeffery D. Amato & Thomas Laubach, 2002. "Implications of habit formation for optimal monetary policy," BIS Working Papers 121, Bank for International Settlements.
    4. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
    5. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February.
    6. Coenen, Guenter & Wieland, Volker, 2003. "The Zero-Interest-Rate and the Role of the Exchange Rate for Monetary Policy in Japan," CFS Working Paper Series 2003/09, Center for Financial Studies (CFS).
    7. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
    8. Robert Kollmann, 2002. "Monetary policy rules in the open economy: effects of welfare and business cycles," ULB Institutional Repository 2013/7628, ULB -- Universite Libre de Bruxelles.
    9. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 1998. "The Perils of Taylor Rules," Working Papers 98-37, C.V. Starr Center for Applied Economics, New York University.
    10. Svensson, Lars, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Seminar Papers 687, Stockholm University, Institute for International Economic Studies.
    11. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Working Paper 00-03, Federal Reserve Bank of Richmond.
    12. Detken, Carsten & Gaspar, Vítor, 2003. "Maintaining price stability under free-floating: a fearless way out of the corner?," Working Paper Series 0241, European Central Bank.
    13. Robert E. Lucas, Jr., 1980. "Rules, Discretion, and the Role of the Economic Advisor," NBER Chapters, in: Rational Expectations and Economic Policy, pages 199-210 National Bureau of Economic Research, Inc.
    14. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
    15. Orphanides, Athanasios & Wieland, Volker, 2000. "Efficient Monetary Policy Design near Price Stability," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 327-365, December.
    16. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    17. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    18. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 947-981, July.
    19. Coenen, Gunter & Wieland, Volker, 2003. "The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1071-1101, July.
    20. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
    21. Alexander L. Wolman, 1998. "Staggered price setting and the zero bound on nominal interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-24.
    22. Gauti B. Eggertsson & Michael Woodford, 2003. "Optimal Monetary Policy in a Liquidity Trap," NBER Working Papers 9968, National Bureau of Economic Research, Inc.
    23. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    24. Bennett T. McCallum, 2000. "Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates," NBER Working Papers 7677, National Bureau of Economic Research, Inc.
    25. Gerlach, Stefan & Smets, Frank, 2000. "MCIs and monetary policy," European Economic Review, Elsevier, vol. 44(9), pages 1677-1700, October.
    Full references (including those not matched with items on IDEAS)

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    as in new window


    Cited by:

    1. Hagedorn, Marcus, 2008. "Nominal and real interest rates during an optimal disinflation in New Keynesian models," Working Paper Series 0878, European Central Bank.
    2. Sebastian Edwards, 2006. "External Imbalances in an Advanced, Commodity-Exporting Country: The Case of New Zealand," NBER Working Papers 12620, National Bureau of Economic Research, Inc.
    3. Jacek Krawczyk & Rishab Sethi, 2007. "Satisficing Solutions for New Zealand Monetary Policy," Reserve Bank of New Zealand Discussion Paper Series DP2007/03, Reserve Bank of New Zealand.
    4. Vitor Gaspar & Frank Smets & David Vestin, 2006. "Optimal Monetary Policy under Adaptive Learning," Computing in Economics and Finance 2006 183, Society for Computational Economics.
    5. Teo, Wing Leong, 2009. "Can exchange rate rules be better than interest rate rules?," Japan and the World Economy, Elsevier, vol. 21(3), pages 301-311, August.
    6. Bennett T. McCallum, 2007. "Monetary Policy in East Asia: the Case of Singapore," IMES Discussion Paper Series 07-E-010, Institute for Monetary and Economic Studies, Bank of Japan.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Access and download statistics

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:0088. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.