Monetary Policy Interactions: The Policy Rate, Asset Purchases and Optimal Policy with an Interest Rate Peg

Isabel Gödl-Hanisch (), Ronald Mau and Jonathan Rawls

No 2412, Working Papers from Federal Reserve Bank of Dallas

Abstract: We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. These channels arise due to a liquidity premium to long-term debt present in our model. The “divine coincidence” holds with the nominal short rate and central bank balance sheet available as policy tools—dual-instrument policy. Targeting the liquidity premium using balance sheet policy provides a determinate equilibrium with a fixed policy rate, as does inflation-targeting balance sheet policy. While the liquidity premium in our model depends on unobservable components, the slope of the yield curve serves as a proxy for the liquidity premium when thinking about implementable monetary policy strategies that respond to observable variables alone. We quantify the welfare costs to various monetary policy strategies relative to the analytically derived optimal dual-instrument policy.

Keywords: unconventional monetary policy; optimal monetary policy; New Keynesian model; policy rate; Interest rate (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Pages: 37
Date: 2024-11-09
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.dallasfed.org/-/media/documents/research/papers/2024/wp2412.pdf Full text (application/pdf)
https://www.dallasfed.org/-/media/documents/research/papers/2024/wp2412a.pdf Appendix (application/pdf)

Related works:
Working Paper: Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:99106

Ordering information: This working paper can be ordered from

DOI: 10.24149/wp2412

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman ().