Exchange-rate policy and the zero bound on nominal interest rates

Günter Coenen and Volker Wieland

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylized micro-founded two-country model to check our qualitative findings. We find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target path is not directly observable.

Keywords: monetary policy rules; zero-interest-rate bound; liquidity trap; rational expectations; nominal rigidities; exchange rates; monetary transmission (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E61 (search for similar items in EconPapers)
Date: 2004-01
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Citations: View citations in EconPapers (51)

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Related works:
Journal Article: Exchange-Rate Policy and the Zero Bound on Nominal Interest Rates (2004)
Working Paper: Exchange-rate policy and the zero bound on nominal interest rates (2004)
Working Paper: Exchange Rate Policy and the Zero Bound on Nominal Interest Rates (2004)
Working Paper: Exchange-rate policy and the zero bound on nominal interest (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:76687

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