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
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
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Working Paper: Cost Channel, Interest Rate Pass-Through and Optimal Policy under Zero Lower Bound (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:72762
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