Optimal monetary policy rules in a two-country economy with a zero bound on nominal interest rates

Daisuke Ida

The North American Journal of Economics and Finance, 2013, vol. 24, issue C, 223-242

Abstract: This paper investigates optimal monetary policy rules when two large countries simultaneously face non-negativity constraints on nominal interest rates. Under policy coordination, domestic optimal monetary policy rules depend on domestic endogenous variables, foreign inflation, and domestic and foreign policy rates when the zero lower bound is never binding. Such policy rules generally lose the optimality once both countries face the zero bound simultaneously. We demonstrate that even in such a situation the domestic central bank can obtain an optimal interest rate rule that retains the history dependence from endogenous variables such as inflation and the output gap of both countries.

Keywords: Optimal monetary policy rule; Zero lower bound; Policy coordination; History dependence (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:24:y:2013:i:c:p:223-242

DOI: 10.1016/j.najef.2012.10.006

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