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Cost Channel, Interest Rate Pass-Through and Optimal Policy under Zero Lower Bound

Siddhartha Chattopadhyay () and Taniya Ghosh ()

Working Papers from eSocialSciences

Abstract: This paper analyzes optimal monetary policy under zero lower bound in the presence of cost channel. Cost channel introduces trade-o¤ between output and inflation when economy is out of ZLB. As a result, exit time both under discretion and commitment is endogenous in the presence of cost channel. Paper also finds that commitment outperforms discretion by promising future boom and inflation and a T-only policy closely replicates commitment both under presence and absence of cost channel.

Keywords: New-Keynesian Model; Cost Channel; Liquidity Trap; canonical; workhorse; monetary policy; communicated; inflation; discretion; replicate; commitment; post-exit; prescription; divine coincidence; literature (search for similar items in EconPapers)
Date: 2017-05
Note: Institutional Papers
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Working Paper: Cost Channel, Interest Rate Pass-Through and Optimal Policy under Zero Lower Bound (2016) Downloads
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