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

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  • Proaño Acosta, Christian
  • Lojak, Benjamin

Abstract

In this paper we investigate the risk-related effects of monetary policy both 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

  • Proaño Acosta, Christian & Lojak, Benjamin, 2019. "Animal spirits, risk premia and monetary policy at the zero lower bound," BERG Working Paper Series 148, Bamberg University, Bamberg Economic Research Group.
    • Handle: RePEc:zbw:bamber:148
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    3. 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.
    4. Proaño, Christian R. & Lojak, Benjamin, 2021. "Monetary Policy with a State-Dependent Inflation Target in a Behavioral Two-Country Monetary Union Model," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    5. Savin, Ivan & Mundt, Philipp, 2022. "Drivers of productivity change in global value chains: Reallocation vs. innovation," Economics Letters, Elsevier, vol. 220(C).
    6. Gardini, Laura & Radi, Davide & Schmitt, Noemi & Sushko, Iryna & Westerhoff, Frank, 2023. "Sentiment-driven business cycle dynamics: An elementary macroeconomic model with animal spirits," Journal of Economic Behavior & Organization, Elsevier, vol. 210(C), pages 342-359.
    7. Xu, Xin & Xu, Xiaoguang, 2023. "Monetary policy transmission modeling and policy responses," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    8. Sahm, Marco, 2022. "Optimal accuracy of unbiased Tullock contests with two heterogeneous players," BERG Working Paper Series 175, Bamberg University, Bamberg Economic Research Group.
    9. Mundt, Philipp & Cantner, Uwe & Inoue, Hiroyasu & Savin, Ivan & Vannuccini, Simone, 2021. "Market selection in global value chains," BERG Working Paper Series 170, Bamberg University, Bamberg Economic Research Group.
    10. Philipp Mundt & Simone Alfarano & Mishael Milaković, 2022. "Survival and the Ergodicity of Corporate Profitability," Management Science, INFORMS, vol. 68(5), pages 3726-3734, May.
    11. Masciandaro, Donato, 2022. "Independence, conservatism, and beyond: Monetary policy, central bank governance and central banker preferences (1981–2021)," Journal of International Money and Finance, Elsevier, vol. 122(C).
    12. Schulz, Jan & Mayerhoffer, Daniel M., 2021. "A network approach to consumption," BERG Working Paper Series 173, Bamberg University, Bamberg Economic Research Group.
    13. Arpan Chakraborty, 2024. "Beyond Rationality: Unveiling the Role of Animal Spirits and Inflation Extrapolation in Central Bank Communication of the US," Papers 2409.10938, arXiv.org, revised Mar 2025.
    14. Donato Masciandaro, 2021. "Central Bank Governance in Monetary Policy Economics (1981-2020)," BAFFI CAREFIN Working Papers 21153, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
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