Dynamic Debt Deleveraging and Optimal Monetary Policy

Pierpaolo Benigno, Gauti Eggertsson and Federica Romei

American Economic Journal: Macroeconomics, 2020, vol. 12, issue 2, 310-50

Abstract: This paper proposes a postcrisis New Keynesian model that incorporates agent heterogeneity in borrowing and lending with a minimum set of assumptions. Unlike the standard framework, this model makes the natural rate of interest endogenous and dependent on macroeconomic policy. The main application is to study optimal monetary policy at the zero lower bound (ZLB). Such policy succeeds in raising the natural rate of interest by creating an environment that speeds up deleveraging and thus endogenously shortens the crisis and the duration of binding ZLB. Inflation should be front-loaded and should overshoot its long-term target during the ZLB episode.

JEL-codes: E12 E31 E32 E43 E52 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Dynamic Debt Deleveraging and Optimal Monetary Policy (2016)
Working Paper: Dynamic Debt Deleveraging and Optimal Monetary Policy (2015)
Working Paper: Dynamic Debt Deleveraging and Optimal Monetary Policy (2014)
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DOI: 10.1257/mac.20160124

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