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

Siddhartha Chattopadhyay () and Taniya Ghosh ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes optimal monetary policy under zero lower bound in the presence of cost channel. Cost channel introduces trade-off 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. We also find 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. Moreover, the exit date (from ZLB) under discretion, commitment and T-only policy rises with the magnitude of demand shock given the degree of interest rate pass-through irrespective if the cost channel is present. We also show that, while exit date both under discretion and T-only policy rises with the degree of interest rate pass-through/credit market imperfection, it falls under commitment given demand shock.

Keywords: New-Keynesian Model; Cost Channel; Liquidity Trap (search for similar items in EconPapers)
JEL-codes: E52 E58 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cse, nep-dge, nep-mac and nep-mon
Date: 2016-07-20
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Working Paper: Cost Channel, Interest Rate Pass-Through and Optimal Policy under Zero Lower Bound (2017) Downloads
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