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Liquidity Trap and Optimal Monetary Policy Revisited

Author

Listed:
  • Kohei Hasui

    (Kobe University)

  • Tomohiro Sugo

    (European Central Bank)

  • Yuki Teranishi

    (Keio University)

Abstract

This paper investigates history dependent easing known as a conventional wis- dom of optimal monetary policy in a liquidity trap. We show that, in an economy where the rate of inflation exhibits intrinsic persistence, monetary tightening is earlier as inflation becomes more persistent. This property is referred as early tightening and in the case of a higher degree of inflation persistence, a central bank implements front-loaded tightening so that it terminates the zero interest rate policy even before the natural rate of interest turns positive. As a prominent feature in a liquidity trap, a forward guidance of smoothing the change in inflation rates contributes to an early termination of the zero interest rate policy.

Suggested Citation

  • Kohei Hasui & Tomohiro Sugo & Yuki Teranishi, 2016. "Liquidity Trap and Optimal Monetary Policy Revisited," UTokyo Price Project Working Paper Series 061, University of Tokyo, Graduate School of Economics.
    • Handle: RePEc:upd:utppwp:061
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    References listed on IDEAS

    as
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    Cited by:

    1. He Nie & Jordan Roulleau-Pasdeloup, 2023. "The promises (and perils) of control-contingent forward guidance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 77-98, July.
    2. Lasitha R. C. Pathberiya, 2016. "Optimal Monetary Policy at the Zero Lower Bound on Nominal Interest Rates in a Cost Channel Economy," Discussion Papers Series 568, School of Economics, University of Queensland, Australia.
    3. Nakata, Taisuke & Ogaki, Ryota & Schmidt, Sebastian & Yoo, Paul, 2019. "Attenuating the forward guidance puzzle: Implications for optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 90-106.
    4. Bodo Herzog, 2020. "Modelling the Interaction of Liquidity to Price Dynamics," Economics Bulletin, AccessEcon, vol. 40(2), pages 1420-1430.
    5. Florin O. Bilbiie, 2019. "Optimal Forward Guidance," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 310-345, October.
    6. Michau, Jean-Baptiste, 2019. "Monetary and fiscal policy in a liquidity trap with inflation persistence," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 1-28.
    7. Roulleau-Pasdeloup, Jordan, 2020. "Optimal monetary policy and determinacy under active/passive regimes," European Economic Review, Elsevier, vol. 130(C).

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    More about this item

    Keywords

    liquidity trap; optimal monetary policy; inflation persistence; early tightening; forward guidance;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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