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Speed Limit Policy and Liquidity Traps

Author

Listed:
  • Taisuke Nakata

    (Board of Governors of the Federal Reserve System (E-mail: taisuke.nakata@frb.gov))

  • Sebastian Schmidt

    (European Central Bank (E-mail: sebastian.schmidt@ecb.int))

  • Paul Yoo

    (UNC Kenan-Flagler Business School (E-mail: paul_yoo@kenan-flagler.unc.edu))

Abstract

The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs) - policies aimed at stabilizing the 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.

Suggested Citation

  • Taisuke Nakata & Sebastian Schmidt & Paul Yoo, 2018. "Speed Limit Policy and Liquidity Traps," IMES Discussion Paper Series 18-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:18-e-06
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    File URL: https://www.imes.boj.or.jp/research/papers/english/18-E-06.pdf
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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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