Stabiliztion policy options in a lower and longer (L&L) interest rates environment

D.M. Nachane ()
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D.M. Nachane: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: During episodes of severe depression, interest rates can approach the zero lower bound (ZLB) and stay there for a fairly long time. Mainstream macroeconomic theory (the so-called New Consensus Economics) then fails to provide adequate guidance under a Taylor type rule to conventional monetary policy. Various alternatives have been suggested to revitalize monetary policy in such a situation. The major alternatives can be divided into three categories viz. (i) those that do not recognize the ZLB as an effective floor (ii) those based on the Keynesian liquidity trap and (iii) those based (implicitly) on Hawtrey's credit deadlock. We discuss these alternatives with a special focus on QE (Quantitative Easing). In particular, we draw attention to the largely ignored fact that QE had been suggested by the British economist Hawtrey at least as early as 1931 in the policy debates on ways to emerge from the Great Depression.

Keywords: Zero lower bound; Price-gap target; Currency depreciation; Forward guidance; Quantitative easing; Liquidity trap; Credit deadlock (search for similar items in EconPapers)
JEL-codes: E4 E5 N1 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2024-03
New Economics Papers: this item is included in nep-cba, nep-his and nep-mon
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