(Un)conventional policy and the effective lower bound

Fiorella De Fiore and Oreste Tristani

No 2183, Working Paper Series from European Central Bank

Abstract: We study the optimal combination of conventional (interest rates) and unconventional (credit easing) monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that unconventional measures can be a powerful substitute for interest rate policy in the face of certain financial shocks. Such measures help shield the real economy from the deterioration in financial conditions and warrant smaller reductions in interest rates. They therefore lower the likelihood of hitting the lower bound constraint. The alternative option to cut interest rates more deeply and avoid deploying unconventional measures is sub-optimal, as it would induce unnecessarily large changes in savers' intertemporal consumption patterns. JEL Classification: E44, E52, E61

Keywords: asymmetric information; optimal monetary policy; unconventional policies; zero-lower bound (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: 24907
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Related works:
Journal Article: (Un)conventional policy and the effective lower bound (2019)
Working Paper: (Un)conventional policy and the effective lower bound (2019)
Working Paper: (Un)conventional Policy and the Effective Lower Bound (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20182183

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