Imperfect credibility and the zero lower bound

Martin Bodenstein, James Hebden and Ricardo Nunes

Journal of Monetary Economics, 2012, vol. 59, issue 2, 135-149

Abstract: As the nominal interest rate cannot fall below zero, a central bank with imperfect credibility faces a significant challenge to stabilize the economy in a New Keynesian model during a large recession. We characterize the optimal monetary policy at the zero lower bound for the nominal interest rate if credibility is imperfect. Confronting monetary policy communication of the U.S. Federal Reserve and the Swedish Riksbank with such a framework, the credibility of both institutions is shown to have been low in the aftermath of the 2008 economic crisis.

Date: 2012
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Citations: View citations in EconPapers (94)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:59:y:2012:i:2:p:135-149

DOI: 10.1016/j.jmoneco.2012.01.002

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