Optimal irreversible monetary policy

Kohei Hasui, Teruyoshi Kobayashi and Tomohiro Sugo

European Economic Review, 2021, vol. 134, issue C

Abstract: Real-world central banks have a strong aversion to policy reversals. Nevertheless, theoretical models of monetary policy within the dynamic general equilibrium framework normally ignore the irreversibility of interest rate control. In this paper, we develop a formal model that incorporates a central bank’s discretionary optimization problem with an aversion to policy reversals. We show that, even under a discretionary regime, the optimal timing of liftoff from the zero lower bound is characterized by its history dependence, which arises from the option value to waiting, and there exists an optimal degree of policy irreversibility at which the social loss is minimized.

Keywords: Monetary policy; Policy irreversibility; Reversal aversion; Liquidity trap (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E61 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:134:y:2021:i:c:s001429212100060x

DOI: 10.1016/j.euroecorev.2021.103707

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