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

Olivier Jeanne and Lars Svensson

No 2004/162, IMF Working Papers from International Monetary Fund

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: WP; mover accent; Zero lower bound for interest rates; deflation; balance-sheet concern; price level; optimization problem; central-bank capital; budget constraint; output gap; Exchange rates; Liquidity; Inflation; Currencies; Capital adequacy requirements (search for similar items in EconPapers)
Pages: 44
Date: 2004-09-01
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Citations: View citations in EconPapers (21)

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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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