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(Un)conventional Policy and the Effective Lower Bound

Fiorella De Fiore () and Oreste Tristani

No 13585, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the optimal combination of interest rate policy and unconventional monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that credit policy can be a powerful substitute for interest rate policy. In the face of shocks that negatively affect bank monitoring efficiency, unconventional measures insulate the real economy from further deterioration in financial conditions and it may be optimal for the central bank not to cut rates to zero. Thus, credit policy lowers the likelihood of hitting the zero bound constraint. Reductions in the policy rates without non-standard measures are sub-optimal as they force savers to inefficiently change their intertemporal consumption patterns.

Keywords: asymmetric information; Optimal monetary policy; unconventional policies; zero-lower bound (search for similar items in EconPapers)
JEL-codes: E44 E52 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2019-03
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