A Monetary Policy Rule for Automatic Prevention of a Liquidity Trap

Edited by Bennett T. McCallum

in Monetary Policy with Very Low Inflation in the Pacific Rim

Published by University of Chicago Press

Published in print October 2006 | ISBN: 9780226378978
Published online February 2013 | e-ISBN: 9780226379012 | DOI:
A Monetary Policy Rule for Automatic Prevention of a Liquidity Trap

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This chapter deals with developing a monetary policy rule which helps the authorities to avoid deflation altogether. It specifically describes the development and exploration of a monetary-policy rule that is appropriate for use at all times, whether or not short-term nominal interest rates are at their zero lower bound (ZLB). It is noted that the MC rule does provide effective stabilization even with Rt at the ZLB and that the MC rule can perform as well as the Rt rule when the ZLB is irrelevant. The simulations show that under conditions implying that monetary policy via an interest rate rule would be immobilized by the ZLB constraint, the MC rule would provide strong stabilizing policy actions. Under conditions such that the ZLB constraint is not relevant, the MC rule would not significantly hinder monetary policy.

Keywords: monetary policy rule; deflation; zero lower bound; MC rule; simulations; interest rate rule

Chapter.  13537 words.  Illustrated.

Subjects: Business and Management

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