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Animal spirits, risk premia and monetary policy at the zero lower bound

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  • Christian R. Proaño
  • Benjamin Lojak

Abstract

In this paper we investigate the risk-related effects of monetary policy in normal times, as well as in periods where the zero lower bound (ZLB) binds, in a stylized macroeconomic model with boundedly rational beliefs. In our model, financial market participants use heuristics to assess the risk premium over the policy rate in accordance to an “implicit Taylor rule” that measures the stance of conventional monetary policy and which serves as an informative instrument during times when the funds rate is constrained by the ZLB. In such a case, conventional monetary policy is exhausted so that the central bank is forced to use unconventional types of policy. We propose alternative monetary policy measures to help the economy out of the liquidity trap which take into account this assumed form of bounded rationality.

Suggested Citation

  • Christian R. Proaño & Benjamin Lojak, 2019. "Animal spirits, risk premia and monetary policy at the zero lower bound," CAMA Working Papers 2019-73, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2019-73
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2019-09/73_2019_proano_lojak.pdf
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    Cited by:

    1. Arata, Yoshiyuki & Mundt, Philipp, 2019. "Topology and formation of production input interlinkages: Evidence from Japanese microdata," BERG Working Paper Series 152, Bamberg University, Bamberg Economic Research Group.

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    Keywords

    Behavioral Macroeconomics; Monetary Policy; Zero Lower Bound; Bounded Rationality;

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