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Optimal monetary policy mix at the zero lower bound

Author

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  • Bonciani, Dario
  • Oh, Joonseok

Abstract

We study the optimal mix of forward guidance and quantitative easing at the ZLB. The welfare loss function depends on inflation, output, and consumption heterogeneity (which we label as inequality) between different households. When solely focusing on inflation and output, the central bank excessively expands its balance sheet, thereby increasing inequality. Forward guidance is more effective at stabilising inflation, and quantitative easing at stabilising output. The two tools are, therefore, complementary. Since neither instrument can fully neutralise adverse demand shocks, the optimal policy combines both, resulting in a shorter ZLB duration and milder balance-sheet expansion than if the central bank relied on one policy instrument alone.

Suggested Citation

  • Bonciani, Dario & Oh, Joonseok, 2025. "Optimal monetary policy mix at the zero lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 170(C).
    • Handle: RePEc:eee:dyncon:v:170:y:2025:i:c:s0165188924001933
    DOI: 10.1016/j.jedc.2024.105001
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    Keywords

    Optimal monetary policy; Unconventional monetary policy; Forward guidance; Quantitative easing; Zero lower bound;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • 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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