IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20182183.html
   My bibliography  Save this paper

(Un)conventional policy and the effective lower bound

Author

Listed:
  • De Fiore, Fiorella
  • Tristani, Oreste

Abstract

We study the optimal combination of conventional (interest rates) and unconventional (credit easing) monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that unconventional measures can be a powerful substitute for interest rate policy in the face of certain financial shocks. Such measures help shield the real economy from the deterioration in financial conditions and warrant smaller reductions in interest rates. They therefore lower the likelihood of hitting the lower bound constraint. The alternative option to cut interest rates more deeply and avoid deploying unconventional measures is sub-optimal, as it would induce unnecessarily large changes in savers' intertemporal consumption patterns. JEL Classification: E44, E52, E61

Suggested Citation

  • De Fiore, Fiorella & Tristani, Oreste, 2018. "(Un)conventional policy and the effective lower bound," Working Paper Series 2183, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182183
    Note: 24907
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2183.en.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Simon Gilchrist & Raphael Schoenle & Jae Sim & Egon Zakrajšek, 2017. "Inflation Dynamics during the Financial Crisis," American Economic Review, American Economic Association, vol. 107(3), pages 785-823, March.
    2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    3. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
    4. Fiorella De Fiore & Pedro Teles & Oreste Tristani, 2011. "Monetary Policy and the Financing of Firms," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 112-142, October.
    5. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
    6. Michele Lenza & Huw Pill & Lucrezia Reichlin, 2010. "Monetary policy in exceptional times [Preventing deflation: Lessons from Japan’s experience in the 1990s]," Economic Policy, CEPR;CES;MSH, vol. 25(62), pages 295-339.
    7. Anton Nakov, 2008. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 73-127, June.
    8. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
    9. Boneva, Lena Mareen & Braun, R. Anton & Waki, Yuichiro, 2016. "Some unpleasant properties of loglinearized solutions when the nominal rate is zero," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 216-232.
    10. Abbate, Angela & Eickmeier, Sandra & Prieto, Esteban, 2016. "Financial shocks and inflation dynamics," Discussion Papers 41/2016, Deutsche Bundesbank.
    11. Harrison, Richard, 2017. "Optimal quantitative easing," Bank of England working papers 678, Bank of England.
    12. Fiorella De Fiore & Oreste Tristani, 2011. "Credit and the Natural Rate of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 407-440, March.
    13. Woodford, Michael, 2010. "Optimal Monetary Stabilization Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 14, pages 723-828, Elsevier.
    14. David L. Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    15. Mr. Pau Rabanal & Mr. Dominic Quint, 2017. "Should Unconventional Monetary Policies Become Conventional?," IMF Working Papers 2017/085, International Monetary Fund.
    16. Marco Del Negro & Gauti Eggertsson & Andrea Ferrero & Nobuhiro Kiyotaki, 2017. "The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities," American Economic Review, American Economic Association, vol. 107(3), pages 824-857, March.
    17. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599, Elsevier.
    18. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
    19. 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.
    20. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-966, November.
    21. Mark Gertler & Peter Karadi, 2013. "QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 5-53, January.
    22. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    23. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    24. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
    25. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    26. Benjamin M. Friedman & Michael Woodford (ed.), 2010. "Handbook of Monetary Economics," Handbook of Monetary Economics, Elsevier, edition 1, volume 3, number 3.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. Robert Kurtzman & David Zeke, 2020. "Misallocation Costs of Digging Deeper into the Central Bank Toolkit," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 94-126, October.
    2. Grahame Johnson & Sharon Kozicki & Romanos Priftis & Lena Suchanek & Jonathan Witmer & Jing Yang, 2020. "Implementation and Effectiveness of Extended Monetary Policy Tools: Lessons from the Literature," Discussion Papers 2020-16, Bank of Canada.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bhattarai, Saroj & Lee, Jae Won & Park, Woong Yong, 2015. "Optimal monetary policy in a currency union with interest rate spreads," Journal of International Economics, Elsevier, vol. 96(2), pages 375-397.
    2. Gauti Eggertsson & Sergey Egiev & Alessandro Lin & Josef Platzer & Luca Riva, 2021. "A Toolkit for Solving Models with a Lower Bound on Interest Rates of Stochastic Duration," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 121-173, July.
    3. Mr. Pau Rabanal & Mr. Dominic Quint, 2017. "Should Unconventional Monetary Policies Become Conventional?," IMF Working Papers 2017/085, International Monetary Fund.
    4. Binder, Michael & Lieberknecht, Philipp & Quintana, Jorge & Wieland, Volker, 2017. "Model Uncertainty in Macroeconomics: On the Implications of Financial Frictions," CEPR Discussion Papers 12013, C.E.P.R. Discussion Papers.
    5. Arce, Óscar & Nuño, Galo & Thaler, Dominik & Thomas, Carlos, 2020. "A large central bank balance sheet? Floor vs corridor systems in a New Keynesian environment," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 350-367.
    6. Mr. Mark R. Stone & Kotaro Ishi & Mr. Kenji Fujita, 2011. "Should Unconventional Balance Sheet Policies Be Added to the Central Bank toolkit? a Review of the Experience so Far," IMF Working Papers 2011/145, International Monetary Fund.
    7. Billi, Roberto M., 2018. "Price level targeting and risk management," Economic Modelling, Elsevier, vol. 73(C), pages 163-173.
    8. Anna Duszak, 2018. "Does the Way of Financing Quantitative Easing Programmes Matter?," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 10(2), pages 101-131, June.
    9. Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2017. "Forward Guidance And The State Of The Economy," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1593-1624, October.
    10. Lindé, J. & Smets, F. & Wouters, R., 2016. "Challenges for Central Banks’ Macro Models," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2185-2262, Elsevier.
    11. Meixing Dai & Frédéric Dufourt & Qiao Zhang, 2013. "Large Scale Asset Purchases with segmented mortgage and corporate loan markets," Working Papers of BETA 2013-20, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    12. Lindé, Jesper & Smets, Frank & Wouters, Rafael, 2016. "Challenges for Central Banks´ Macro Models," Working Paper Series 323, Sveriges Riksbank (Central Bank of Sweden).
    13. Böhl, Gregor & Goy, Gavin & Strobel, Felix, 2020. "A structural investigation of quantitative easing," IMFS Working Paper Series 142, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    14. Gauti B. Eggertsson, 2013. "Fiscal Multipliers and Policy Coordination," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Jordi Galí (ed.),Fiscal Policy and Macroeconomic Performance, edition 1, volume 17, chapter 6, pages 175-234, Central Bank of Chile.
    15. Fernández-Villaverde, Jesús & Gordon, Grey & Guerrón-Quintana, Pablo & Rubio-Ramírez, Juan F., 2015. "Nonlinear adventures at the zero lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 182-204.
    16. Fujiwara, Ippei & Nakajima, Tomoyuki & Sudo, Nao & Teranishi, Yuki, 2013. "Global liquidity trap," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 936-949.
    17. Jesper Lindé & Mathias Trabandt, 2018. "Should we use linearized models to calculate fiscal multipliers?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(7), pages 937-965, November.
    18. Ellison, Martin & Tischbirek, Andreas, 2014. "Unconventional government debt purchases as a supplement to conventional monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 199-217.
    19. Quint, Dominic & Tristani, Oreste, 2018. "Liquidity provision as a monetary policy tool: The ECB’s non-standard measures after the financial crisis," Journal of International Money and Finance, Elsevier, vol. 80(C), pages 15-34.
    20. Roberto M. Billi, 2011. "Optimal Inflation for the US Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 29-52, July.

    More about this item

    Keywords

    asymmetric information; optimal monetary policy; unconventional policies; zero-lower bound;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20182183. 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: . General contact details of provider: https://edirc.repec.org/data/emieude.html .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.