Non-standard monetary policy measures in the new normal

Anna Bartocci, Alessandro Notarpietro and Massimiliano Pisani

No 1251, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We evaluate the macroeconomic effects of long-term sovereign bond purchases by the central bank in the ‘New Normal’, i.e. in an economy with a low equilibrium real interest rate and a high probability of hitting the zero lower bound (ZLB) on the short-term policy rate. Our analysis is based on the simulations of a dynamic general equilibrium model for the euro area. The main results are the following. First, long-term sovereign bond purchases reacting to a positive inflation gap help stabilize macroeconomic conditions when the monetary policy rate hits the ZLB. Second, these purchases are an effective stabilization tool following positive shocks to the sovereign term premium (financial shocks) and negative shocks to aggregate demand (real shocks). Third, purchases that also react to the long-term rates are effective in the case of recessionary financial shocks but not in the case of recessionary real shocks and fourth, to stabilize the effects of expansionary shocks, the central bank can increase the short-term monetary policy rate according to an ‘aggressive’ Taylor rule, instead of selling long-term sovereign bonds.

Keywords: euro area; non-standard monetary policy; zero lower bound (search for similar items in EconPapers)
JEL-codes: E31 E32 E58 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1251_19

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