The Zero-Interest-Rate and the Role of the Exchange Rate for Monetary Policy in Japan

Günter Coenen and Volker Wieland

No 2003/09, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: In this paper we study the role of the exchange rate in conducting monetary policy in an economy with near-zero nominal interest rates as experienced in Japan since the mid-1990s. Our analysis is based on an estimated model of Japan, the United States and the euro area with rational expectations and nominal rigidities. First, we provide a quantitative analysis of the impact of the zero bound on the effectiveness of interest rate policy in Japan in terms of stabilizing output and inflation. Then we evaluate three concrete proposals that focus on depreciation of the currency as a way to ameliorate the effect of the zero bound and evade a potential liquidity trap. Finally, we investigate the international consequences of these proposals.

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: 2003
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Citations: View citations in EconPapers (138)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200309

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