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A Model of Post-2008 Monetary Policy

Author

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  • Behzad Diba

    (Department of Economics, Georgetown University)

  • Olivier Loisel

    (CREST-ENSAE, IP Paris - Institut Polytechnique de Paris)

Abstract

We introduce banks and bank reserves into the basic New Keynesian model and allow the central bank to set both the interest rate on reserves (IOR rate) and the nominal stock of reserves. Our model can account, in qualitative terms, for three key features of US inflation during the recent zero-lower-bound (ZLB) episodes: no significant deflation, little inflation volatility, and no significant inflation following quantitative-easing policies. Crucial to this result is our assumption that demand for bank reserves got close to satiation, but did not reach full satiation. We introduce liquid government bonds into the model to reconcile our non-satiation assumption with the fact that Treasury-bill rates were often below the IOR rate during the ZLB episodes. Looking ahead, we explore the implications of our model for the normalization of monetary policy and its operational framework (floor system).

Suggested Citation

  • Behzad Diba & Olivier Loisel, 2025. "A Model of Post-2008 Monetary Policy," Working Papers hal-04892254, HAL.
    • Handle: RePEc:hal:wpaper:hal-04892254
    Note: View the original document on HAL open archive server: https://hal.science/hal-04892254v1
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