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Efficient Monetary Policy Design Near Price Stability (1999)
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| Venue: | Summary of the Discussion Charles Bean (London School of Economics) doubted the |
| Citations: | 89 - 12 self |
BibTeX
@INPROCEEDINGS{Orphanides99efficientmonetary,
author = {Athanasios Orphanides and Volker Wieland},
title = {Efficient Monetary Policy Design Near Price Stability},
booktitle = {Summary of the Discussion Charles Bean (London School of Economics) doubted the},
year = {1999}
}
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Abstract
We study the design of monetary policy in a low inflation environment taking into account the limitations imposed by the zero bound on nominal interest rates. Using numerical dynamic programming methods, we compute optimal policies in a simple, calibrated openeconomy model and evaluate the e#ect of the liquidity trap generated by the zero bound. We consider the possibility that the quantity of base money may a#ect output and inflation even when the interest rate is constrained at zero and explicitly account for the substantial degree of uncertainty regarding such quantity e#ects. As an example of such a quantity e#ect, we focus on the portfolio balance channel through which changes in relative money supplies influence the exchange rate. We find that the optimal policy near price stability is asymmetric, that is, as inflation declines, policy turns expansionary sooner and more aggressively than would be optimal in the absence of the zero bound. As a consequence, the average level of inf...
Keyphrases
zero bound optimal policy quantity ect exchange rate ect output interest rate calibrated openeconomy model price stability monetary policy numerical dynamic programming method average level nominal interest rate inflation decline relative money supply substantial degree liquidity trap portfolio balance channel base money low inflation environment policy turn expansionary sooner
