The Stochastic Lower Bound

Masolo, Riccardo M.; Winant, Pablo

doi:10.2139/ssrn.3240496

SSRN Journal

2018

DOI: 10.2139/ssrn.3240496

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The Stochastic Lower Bound

Riccardo M. Masolo

Pablo Winant

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2020

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Cited by 3 publications

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“…Other papers analysing the role of monetary policy at the ZLB include, for example,Nakov (2008),Cochrane (2017),Nakata (2017), andMasolo and Winant (2019).…”

mentioning

confidence: 99%

Monetary Policy Inertia and the Paradox of Flexibility

Bonciani

2020

SSRN Journal

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This paper revisits the paradox of flexibility, ie, the result that, in a liquidity trap, greater price flexibility amplifies output volatility in response to negative demand shocks. We argue this paradox is the consequence of a failure of standard models to correctly characterise monetary policy and that allowing for a smooth adjustment of the shadow policy rate eliminates the paradox and produces output responses to a negative demand shock that are in line with those under optimal monetary policy. The reason is that, under an inertial policy, a decline in the shadow rate implies that the future actual policy rate will remain relatively low, which increases expectations about the economic outlook and inflation. The rise in inflation expectations reduces the real rate, thereby sustaining real activity. As we raise the degree of price flexibility, a negative demand shock causes a sharper fall in the shadow rate and incr ease in inflation expectations, which leads to a more significant drop in the real rate and, hence, a milder decline in the output gap.

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“…Other papers analysing the role of monetary policy at the ZLB include, for example,Nakov (2008),Cochrane (2017),Nakata (2017), andMasolo and Winant (2019).…”

mentioning

confidence: 99%

Monetary Policy Inertia and the Paradox of Flexibility

Bonciani

2020

SSRN Journal

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“…Other papers analysing the role of monetary policy at the ZLB include, for example,Nakov (2008),Cochrane (2017),Nakata (2017), andMasolo and Winant (2019).…”

mentioning

confidence: 99%

Monetary Policy Inertia and the Paradox of Flexibility

Bonciani¹,

Oh²

2020

SSRN Journal

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Robust Monetary Policy Under Uncertainty About the Lower Bound

Tillmann

2020

The B.E. Journal of Macroeconomics

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Central banks face uncertainty about the true location of the effective lower bound (ELB) on nominal interest rates. We model optimal discretionary monetary policy during a liquidity trap when the central bank designs policy that is robust with respect to the location of the ELB. If the central bank fears the worst-case location of the ELB, monetary conditions will be more expansionary in the period before the liquidity trap.

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The Stochastic Lower Bound

Cited by 3 publications

References 5 publications

Monetary Policy Inertia and the Paradox of Flexibility

Monetary Policy Inertia and the Paradox of Flexibility

Monetary Policy Inertia and the Paradox of Flexibility

Robust Monetary Policy Under Uncertainty About the Lower Bound

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