Gradualism and Liquidity Traps

Nakata, Taisuke; Schmidt, Sebastian

doi:10.17016/feds.2016.092

Cited by 14 publications

(17 citation statements)

References 18 publications

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“…Absent an explicit commitment technology or reputational force, discretionary central bankers are unable to credibly render monetary policy after a liquidity trap contingent on the state of the economy during the trap. To what extent alternative delegation schemes can generate the type of history-dependence seen in optimal commitment policy is a subject of our ongoing research Nakata and Schmidt (2015).…”

Section: Discussionmentioning

confidence: 99%

“…Billi (2013) revisits the desirability of assigning a nominal-income stabilization objective to the central bank. In our ongoing work, we compare the relative benefits of various alternative objectives, including interest-rate smoothing, price-level stabilization, and nominal-income stabilization (Nakata and Schmidt, 2015). This paper is also related to a set of papers that examine the desirability of Rogoff's conservative central banker in settings other than the original model with inflation bias.…”

Section: Introductionmentioning

confidence: 99%

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Conservatism and liquidity traps

Nakata

Schmidt

2019

Journal of Monetary Economics

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In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff's (1985) conservative central banker mitigates this deflationary bias away from the ZLB and enhances welfare by improving allocations both at and away from the ZLB.

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Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Conservatism and liquidity traps

Nakata

Schmidt

2019

Journal of Monetary Economics

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“…However, it achieves this by responding suboptimally to large positive shocks, which increases their pass-through to the economy. A similar, more nuanced approach is to reduce the overall response to shocks (see, e.g., Nakata and Schmidt (2016)). This works through the same mechanism as an upper bound on interest rates and increases expected inflation, but also at the cost of greater pass-through of shocks to the economy.…”

Section: Dovish Policymentioning

confidence: 99%

Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates

Mertens

Williams

2019

AEA Papers and Proceedings

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This paper applies a New Keynesian model to analyze monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under standard inflation-targeting, inflation expectations will be anchored at a level below the inflation target. Two themes emerge from our analysis: first, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework. Second, price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at target and further reduce the effects of the lower bound on the economy.

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“…In this branch of the literature, monetary policy is described by some (generally suboptimal) Taylor-type rule. But the multiplicity of equilibria generated by the zero lower bound is not restricted to that case: as shown in Armenter (2018) and Nakata and Schmidt (2016), it also emerges under the assumption of a central bank optimizing under discretion. 8 Even if such multiplicity is clearly suboptimal, there is little that a central bank operating under discretion can do about it, because the zero lower bound limits its ability to stabilize inflation.…”

Section: Self-fulfilling Deflation Traps and The Zero Lower Boundmentioning

confidence: 99%

The State of New Keynesian Economics: A Partial Assessment

Galı́

2018

Journal of Economic Perspectives

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Keynesian model and its extensions that have been the target of criticism include the assumptions of rational expectations, perfect information, and an infinitelylived representative household.Those criticisms notwithstanding, the New Keynesian model arguably remains the dominant framework in the classroom, in academic research, and in policy modeling. In fact, one can argue that over the past ten years the scope of New Keynesian economics has kept widening, by encompassing a growing number of phenomena that are analyzed using its basic framework, as well as by addressing some of the criticisms raised against it. Much recent research, for instance, has been devoted to extending the basic model to incorporate financial frictions (as described by Gertler and Gilchrist in this issue). In addition, the New Keynesian model has been the framework of choice in much of the work aimed at evaluating alternative proposals to stimulate the economy in the face of the unusual circumstances triggered by the crisis, including the use of fiscal policy and unconventional monetary policies. 2The present paper takes stock of the state of New Keynesian economics by reviewing some of its main insights and by providing an overview of some recent developments. In particular, I discuss some recent work on two very active research programs: the implications of the zero lower bound on nominal interest rates and the interaction of monetary policy and household heterogeneity. Finally, I discuss what I view as some of the main shortcomings of the New Keynesian model and possible areas for future research. The New Keynesian Model: A RefresherModern New Keynesian economics can be interpreted as an effort to combine the methodological tools developed by real business cycle theory with some of the central tenets of Keynesian economics tracing back to Keynes's own General Theory, published in 1936.The hallmark of the approach to modeling economic fluctuations pioneered by real business cycle theorists is a reliance on dynamic, stochastic, general equilibrium frameworks. At some level, these terms describe what seem natural features of any model that seeks to explain economic fluctuations, and as such, these features have been fully adopted by New Keynesian economics. (To put it differently: It is easy to imagine the criticisms that modern macro would receive if it relied on models that were static rather than dynamic, deterministic rather than stochastic, and partial version of that model augmented with financial frictions and external information compares well with Blue Chip consensus forecasts, especially over the medium and long run. 2 See, for example, Blanchard, Erceg, and Lindé (2016) for an analysis of the effectiveness of fiscal policy to stimulate the recovery of the euro area economy using a DSGE model as a framework of reference. Del Negro, Eggertsson, Ferrero, and Kiyotaki (2017) use a standard DSGE model augmented with liquidity frictions to evaluate some of the quantitative easing policies undertaken by the Fed in the wake of the fi...

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Gradualism and Liquidity Traps

Cited by 14 publications

References 18 publications

Conservatism and liquidity traps

Conservatism and liquidity traps

Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates

The State of New Keynesian Economics: A Partial Assessment

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