The pitfalls of speed-limit interest rate rules at the zero lower bound
We show that interest rate rules that feed back on the growth rates of target variables (such as output or asset prices) may induce recessions in the presence of a zero lower bound, through purely self-fulfilling dynamics. This pathology is illustrated in a small New Keynesian model with interest rates responding to the growth rate of output, and in a version of a model by Matteo Iacoviello where interest rates respond to the growth rate of house prices and credit. Our results provide a cautionary note, contrasting with previous work which has suggested several desirable properties of speed-limit rules, namely that they are devices enabling the policymaker (i) to side-step uncertainty about natural rates, (ii) to counter booms and busts in asset prices or (iii) to implement optimal commitment policies.
|Date of creation:||14 Jun 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/Email:
More information through EDIRC
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.:
- Carl Walsh, 2003.
"Speed Limit Policies: The Output Gap and Optimal Monetary Policy,"
American Economic Review,
American Economic Association, vol. 93(1), pages 265-278, March.
- Carl Walsh, 2001. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," CESifo Working Paper Series 609, CESifo Group Munich.
- Páez-Farrell, Juan, 2007.
"Monetary Policy Rules in Theory and in Practice: Evidence from the UK and the US,"
Cardiff Economics Working Papers
E2007/13, Cardiff University, Cardiff Business School, Economics Section.
- Juan Paez-Farrell, 2009. "Monetary policy rules in theory and in practice: evidence from the UK and the US," Applied Economics, Taylor & Francis Journals, vol. 41(16), pages 2037-2046.
- Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011.
"When Is the Government Spending Multiplier Large?,"
Journal of Political Economy,
University of Chicago Press, vol. 119(1), pages 78 - 121.
- Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
- Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2009. "When is the government spending multiplier large?," NBER Working Papers 15394, National Bureau of Economic Research, Inc.
- Marc Paolo Giannoni & Michael Woodford, 2003. "How forward-looking is optimal monetary policy?," Proceedings, Federal Reserve Bank of Cleveland, pages 1425-1483.
- Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
- Javier Andrés & Óscar Arce & Carlos Thomas, 2013.
"Banking Competition, Collateral Constraints, and Optimal Monetary Policy,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 45(s2), pages 87-125, December.
- Javier Andrés & Óscar Arce & Carlos Thomas, 2010. "Banking competition, collateral constraints and optimal monetary policy," Banco de Espa�a Working Papers 1001, Banco de Espa�a.
- Nobuhiro Kiyotaki & Gauti Eggertsson & Andrea Ferrero & Marco Del Negro, 2010. "The Great Escape? A Quantitative Evaluation of the Fed’s Non-Standard Policies," 2010 Meeting Papers 113, Society for Economic Dynamics.
- Morten Ravn & Karel Mertens, 2011.
"Credit Channels in a Liquidity Trap,"
2011 Meeting Papers
1452, Society for Economic Dynamics.
- Livio Stracca, 2007.
"A Speed Limit Monetary Policy Rule for the Euro Area,"
Wiley Blackwell, vol. 10(1), pages 21-41, 03.
- Stracca, Livio, 2006. "A speed limit monetary policy rule for the euro area," Working Paper Series 0600, European Central Bank.
- Blake, Andrew P., 2012. "Determining optimal monetary speed limits," Economics Letters, Elsevier, vol. 116(2), pages 269-271.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Sylvain Leduc & Jean-Marc Natal, 2011. "Should central banks lean against changes in asset prices?," Working Paper Series 2011-15, Federal Reserve Bank of San Francisco.
- Mehra, Yash P., 2002. "Level and growth policy rules and actual Fed policy since 1979," Journal of Economics and Business, Elsevier, vol. 54(6), pages 575-594.
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0473. 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: (Publications Team)
If references are entirely missing, you can add them using this form.