A Time-Invariant Duration Policy under the Zero Lower Bound

Kozo Ueda

No 10-E-12, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: Optimal commitment policy under the zero lower bound entails a high degree of complexity and time-inconsistency in a stochastic economy. This paper proposes a time-invariant duration policy that mitigates those problems and facilitates policy implementation and communication while retaining effectiveness in inflation stabilization. Under the time- invariant duration policy, a central bank commits itself to maintaining low interest rates for some duration even after adverse shocks disappear, but unlike the optimal commitment policy, the duration is independent of the ex post spell of the adverse shocks. Consequently, the time- inconsistency problem does not increase even if the ex post spell of the adverse shocks lengthens, and policy rates are expressed in an extremely simple, explicit form. Simulation results suggest that the time-invariant duration policy performs virtually as effectively as the optimal commitment policy in stabilizing inflation, and far better than a discretionary policy and simple interest rate rules with or without inertia.

Keywords: Zero lower bound on nominal interest rates; optimal monetary policy; liquidity trap; time-inconsistency (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.imes.boj.or.jp/research/papers/english/10-E-12.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:10-e-12

Access Statistics for this paper

More papers in IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Kinken ().