IDEAS home Printed from https://ideas.repec.org/h/spr/sptchp/978-3-030-19697-4_7.html
   My bibliography  Save this book chapter

The Liquidity Trap: Limits for Monetary Policy at the Effective Lower Bound

In: Money: Theory and Practice

Author

Listed:
  • Jin Cao

    (Norges Bank)

  • Gerhard Illing

    (LMU Munich)

Abstract

In this chapter, we explicitly take into account the constraint imposed by the effective lower bound. We show that under this constraint the central bank should aim to keep interest rates low for a long period, in order to stimulate current demand by committing to low long-term rates. We illustrate this feature in a highly stylized three-period framework, characterizing explicitly the optimality conditions involved, and show that there is a problem of dynamic inconsistency, creating a deflation bias. This lesson had a strong impact on actual policy design. The notion of forward guidance, which plays a key role in unconventional policies, follows naturally from commitment to optimal interest rate policy at the zero lower bound. The attempt to communicate and commit in a transparent way to keep the path of short-term interest rates low for an extended period far into the future is a key element of optimal policy.

Suggested Citation

  • Jin Cao & Gerhard Illing, 2019. "The Liquidity Trap: Limits for Monetary Policy at the Effective Lower Bound," Springer Texts in Business and Economics, in: Money: Theory and Practice, chapter 7, pages 221-249, Springer.
    • Handle: RePEc:spr:sptchp:978-3-030-19697-4_7
    DOI: 10.1007/978-3-030-19697-4_7
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:sptchp:978-3-030-19697-4_7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.