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Credit risk and the zero lower bound on interest rates

Author

Listed:
  • Fiorella De Fiore
  • Oreste Tristani

Abstract

This article studies the implications of the zero lower bound on interest rates as a constraint on monetary policy when frictions impair the functioning of financial markets. Compared to a situation without financial market imperfections, the zero lower bound may be hit more frequently when policy follows a simple interest rate rule. Following a deflationary shock, optimal policy entails that prices revert to a higher level than prior to the shock. JEL Classification: E44, E52, E61

Suggested Citation

  • Fiorella De Fiore & Oreste Tristani, 2012. "Credit risk and the zero lower bound on interest rates," Research Bulletin, European Central Bank, vol. 15, pages 12-14.
    • Handle: RePEc:ecb:ecbrbu:2012:0015:3
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    File URL: http://www.ecb.europa.eu/pub/pdf/other/researchbulletin15en.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. 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.
    4. Fiorella De Fiore & Oreste Tristani, 2010. "Financial conditions and monetary policy," Research Bulletin, European Central Bank, vol. 9, pages 10-12.
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    More about this item

    Keywords

    optimal monetary policy; zero-lower bound;

    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

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