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Circumventing the Zero Lower Bound with Monetary Policy Rules Based on Money

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  • Michael T. Belongia

    (University of Mississippi)

  • Peter N. Ireland

    () (Boston College)

Abstract

Discussions of monetary policy rules after the 2008-2009 recession highlight the potential impotence of a central bank's actions when the short-term interest rate under its control is limited by the zero lower bound. This perspective assumes, in a manner consistent with the canonical New Keynesian model, that the quantity of money has no role to play in transmitting a central bank's actions to economic activity. This paper examines the validity of this claim and investigates the properties of alternative monetary policy rules based on control of the monetary base or a monetary aggregate in lieu of a short-term interest rate. The results indicate that rules of this type have the potential to guide monetary policy decisions toward the achievement of a long run nominal goal without being constrained by the zero lower bound on a nominal interest rate. They suggest, in particular, that by exerting its influence over the monetary base or a broader aggregate, the Federal Reserve could more effectively stabilize nominal income around a long-run target path, even in a low or zero interest-rate environment.

Suggested Citation

  • Michael T. Belongia & Peter N. Ireland, 2016. "Circumventing the Zero Lower Bound with Monetary Policy Rules Based on Money," Boston College Working Papers in Economics 911, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:911
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    References listed on IDEAS

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    Cited by:

    1. Michael T. Belongia & Peter N. Ireland, 2016. "A Classical View of the Business Cycle," Boston College Working Papers in Economics 921, Boston College Department of Economics.
    2. repec:eee:jmacro:v:54:y:2017:i:pa:p:12-23 is not listed on IDEAS
    3. Billi, Roberto M., 2018. "Price level targeting and risk management," Economic Modelling, Elsevier, vol. 73(C), pages 163-173.
    4. repec:eee:jmacro:v:54:y:2017:i:pa:p:7-11 is not listed on IDEAS
    5. repec:ijc:ijcjou:y:2018:q:1:a:4 is not listed on IDEAS
    6. Michael T. Belongia & Peter N. Ireland, 2018. "Targeting Constant Money Growth at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 159-204, March.
    7. repec:eee:intfor:v:35:y:2019:i:2:p:443-457 is not listed on IDEAS

    More about this item

    Keywords

    Adjusted monetary base; Divisia monetary aggregates; Monetary policy rules; Nominal income targeting; Zero lower bound;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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

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