Managing Monetary Policy Normalization

Gianluca Benigno and Pierpaolo Benigno

No 17290, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose a new framework for monetary policy analysis to study monetary policy normalization when exiting a liquidity trap. The optimal combination of reserves and interest rate policy requires an increase in liquidity (reserves) a few quarters after the policy rate is set at the effective lower bound. Removal of accommodation requires that quantitative tightening starts before the liftoff of the policy rate. Moreover, the withdrawal of liquidity takes place at a very slow pace relative to the normalization of the policy rate.

Date: 2022-05
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Working Paper: Managing Monetary Policy Normalization (2022)
Working Paper: Managing Monetary Policy Normalization (2022)
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