Exchange Rate Policy and the Zero Bound on Nominal Interest Rates

Volker Wieland and Günter Coenen

No 65, Computing in Economics and Finance 2004 from Society for Computational Economics

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 stylised micro-founded two-country model to check our quantitative 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 is not directly observable.

Keywords: monetary policy rules; zero interest rate bound; liquidity trap; rational expectations; nominal rigidities; exchange rates (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (50)

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http://repec.org/sce2004/up.18339.1076941732.pdf (application/pdf)

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)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf4:65

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