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Speed limit policy and liquidity traps

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  • Nakata, Taisuke
  • Schmidt, Sebastian
  • Yoo, Paul

Abstract

The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs) — policies aimed at stabilizing output growth — less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding. JEL Classification: E52, E61

Suggested Citation

  • Nakata, Taisuke & Schmidt, Sebastian & Yoo, Paul, 2018. "Speed limit policy and liquidity traps," Working Paper Series 2192, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20182192
    Note: 2179645
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    References listed on IDEAS

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    Cited by:

    1. Budianto, Flora & Nakata, Taisuke & Schmidt, Sebastian, 2023. "Average inflation targeting and the interest rate lower bound," European Economic Review, Elsevier, vol. 152(C).
    2. Hills, Timothy S. & Nakata, Taisuke & Schmidt, Sebastian, 2019. "Effective lower bound risk," European Economic Review, Elsevier, vol. 120(C).
    3. Carl E. Walsh, 2019. "Alternatives to Inflation Targeting in Low Interest Rate Environments," IMES Discussion Paper Series 19-E-13, Institute for Monetary and Economic Studies, Bank of Japan.

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    More about this item

    Keywords

    liquidity traps; Markov-perfect equilibrium; speed limit policy; 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
    • 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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