Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg

Isabel Gödl-Hanisch, Ronald Mau and Jonathan Rawls

No 10399, CESifo Working Paper Series from CESifo

Abstract: We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. The “divine coincidence” holds with the nominal short-term rate and central bank balance sheet available as policy tools. Credit spread-targeting balance sheet policy provides a determinate equilibrium with a fixed policy rate. This policy induces similar welfare losses relative to dual-instrument policy as inflation-targeting interest rate policy with a fixed balance sheet.

Keywords: unconventional monetary policy; optimal monetary policy; New Keynesian model; policy rate lower bound; interest rate peg (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Working Paper: Monetary Policy Interactions: The Policy Rate, Asset Purchases and Optimal Policy with an Interest Rate Peg (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10399

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