Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank

Lars Svensson and Olivier Jeanne

No 4599, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange-rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson?s Foolproof Way to escape from a liquidity trap.

Keywords: Zero lower bound for interest rates; Deflation (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-acc, nep-mac and nep-mon
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Related works:
Journal Article: Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank (2007)
Working Paper: Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank (2004)
Working Paper: Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank (2004)
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