Managing Monetary Policy Normalization

Gianluca Benigno and Pierpaolo Benigno

No 1015, Staff Reports from Federal Reserve Bank of New York

Abstract: We propose a new framework for monetary policy analysis to study monetary policy normalization when exiting a liquidity trap. The optimal combination of reserves and interest rate policy requires an increase in liquidity (reserves) a few quarters after the policy rate is set at the effective lower bound. Removal of accommodation requires that quantitative tightening starts before the liftoff of the policy rate. Moreover, the withdrawal of liquidity takes place at a very slow pace relative to the normalization of the policy rate.

Keywords: reserves management; central bank balance sheets; quantitative tightening; quantitative easing; interest on reserves (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 E58 (search for similar items in EconPapers)
Pages: 58
Date: 2022-05-01
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Working Paper: Managing Monetary Policy Normalization (2022)
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