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Exchange-rate policy and the zero bound on nominal interest

Listed author(s):
  • Wieland, Volker
  • Coenen, Günter

In this paper, we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylized micro-founded two-country model to check our qualitative findings. We find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target path is not directly observable.

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File URL: https://www.econstor.eu/bitstream/10419/25438/1/515161314.PDF
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Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2004/14.

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Date of creation: 2004
Handle: RePEc:zbw:cfswop:200414
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