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STABILIZATION POLICY AT THE ZERO LOWER BOUND

Paola Boel and Christopher J. Waller

International Economic Review, 2019, vol. 60, issue 4, 1539-1563

Abstract: We construct a monetary economy with aggregate liquidity shocks and heterogeneous idiosyncratic preference shocks. In this environment, not all agents are satiated at the zero lower bound (ZLB) even when the Friedman rule is the best interest‐rate policy the central bank can implement. As a consequence, central bank stabilization policy, which takes the form of repo arrangements in response to aggregate demand shocks, temporarily relaxes the liquidity constraint of impatient agents at the ZLB. Due to a pecuniary externality, this policy may have beneficial general equilibrium effects for patient agents even if they are unconstrained in their money balances.

Date: 2019
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International Economic Review is currently edited by Michael O'Riordan and Dirk Krueger

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