[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v89y2020icp351-366.html
   My bibliography  Save this article

Taylor Rule implementation of the optimal policy at the zero lower bound: Does the cost channel matter?

Author

Listed:
  • Chattopadhyay, Siddhartha
  • Ghosh, Taniya
Abstract
This paper analyzes the implementation of the optimal policies at the Zero Lower Bound (ZLB) by the Taylor rule in the presence of a cost channel. We find that, the presence of a cost channel significantly impairs the ability of the Taylor rule to implement optimal policies when economy is subject to the ZLB. The main findings of the paper are, (i) the Taylor rule with optimally chosen inflation target partially implements the optimal discretionary policy but cannot implement the optimal policy under commitment, and (ii) the T-only policy, which follows discretion after an optimally chosen exit date from the ZLB, is the best that can be implemented by the Taylor rule in the presence of cost channel.

Suggested Citation

  • Chattopadhyay, Siddhartha & Ghosh, Taniya, 2020. "Taylor Rule implementation of the optimal policy at the zero lower bound: Does the cost channel matter?," Economic Modelling, Elsevier, vol. 89(C), pages 351-366.
    • Handle: RePEc:eee:ecmode:v:89:y:2020:i:c:p:351-366
    DOI: 10.1016/j.econmod.2019.10.032
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999319312829
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2019.10.032?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Julio Garín & Robert Lester & Eric Sims, 2018. "Raise Rates to Raise Inflation? Neo‐Fisherianism in the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(1), pages 243-259, February.
    2. Martín Uribe, 2018. "The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models," NBER Working Papers 25089, National Bureau of Economic Research, Inc.
    3. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
    4. Anton Nakov, 2008. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 73-127, June.
    5. Eurilton Araujo, 2009. "Supply-side effects of monetary policy and the central bank's objective function," Economics Bulletin, AccessEcon, vol. 29(2), pages 680-692.
    6. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    7. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1851-1882, December.
    8. Haroon Mumtaz & Francesco Zanetti, 2013. "The Impact of the Volatility of Monetary Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 535-558, June.
    9. Adam, Klaus & Billi, Roberto M., 2007. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 728-752, April.
    10. Evans, George W. & Guse, Eran & Honkapohja, Seppo, 2008. "Liquidity traps, learning and stagnation," European Economic Review, Elsevier, vol. 52(8), pages 1438-1463, November.
    11. Chowdhury, Ibrahim & Hoffmann, Mathias & Schabert, Andreas, 2006. "Inflation dynamics and the cost channel of monetary transmission," European Economic Review, Elsevier, vol. 50(4), pages 995-1016, May.
    12. S Borağan Aruoba & Pablo Cuba-Borda & Frank Schorfheide, 2018. "Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 87-118.
    13. Siddartha Chattopadhyay & Betty C. Daniel, 2018. "Taylor-Rule Exit Policies for the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 1-53, December.
    14. Gauti B. Eggertsson & Michael Woodford, 2004. "Policy Options in a Liquidity Trap," American Economic Review, American Economic Association, vol. 94(2), pages 76-79, May.
    15. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 707-734.
    16. Smith, A. Lee, 2016. "When does the cost channel pose a challenge to inflation targeting central banks?," European Economic Review, Elsevier, vol. 89(C), pages 471-494.
    17. Siddhartha Chattopadhyay, 2013. "Liquidity Trap and the Conditional Policy Commitment: An Analysis under Adaptive Learning," South Asian Journal of Macroeconomics and Public Finance, , vol. 2(1), pages 1-32, June.
    18. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-835, October.
    19. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    20. Lasitha R. C. Pathberiya, 2016. "Optimal Monetary Policy at the Zero Lower Bound on Nominal Interest Rates in a Cost Channel Economy," Discussion Papers Series 568, School of Economics, University of Queensland, Australia.
    21. Henzel, Steffen & Hülsewig, Oliver & Mayer, Eric & Wollmershäuser, Timo, 2009. "The price puzzle revisited: Can the cost channel explain a rise in inflation after a monetary policy shock?," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 268-289, June.
    22. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    23. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
    24. Ali, Syed Zahid & Anwar, Sajid, 2013. "Inflation and interest rates in the presence of a cost channel, wealth effect and agent heterogeneity," Economic Modelling, Elsevier, vol. 31(C), pages 286-296.
    25. Stephanie Schmitt-Grohé & Martín Uribe, 2017. "Liquidity Traps and Jobless Recoveries," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 165-204, January.
    26. Philip Liu & Konstantinos Theodoridis & Haroon Mumtaz & Francesco Zanetti, 2019. "Changing Macroeconomic Dynamics at the Zero Lower Bound," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(3), pages 391-404, July.
    27. Demirel, Ufuk Devrim, 2013. "Gains from commitment in monetary policy: Implications of the cost channel," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 218-226.
    28. Cochrane, John H., 2017. "The new-Keynesian liquidity trap," Journal of Monetary Economics, Elsevier, vol. 92(C), pages 47-63.
    29. Llosa, Luis-Gonzalo & Tuesta, Vicente, 2009. "Learning about monetary policy rules when the cost-channel matters," Journal of Economic Dynamics and Control, Elsevier, vol. 33(11), pages 1880-1896, November.
    30. Arifovic, Jasmina & Schmitt-Grohé, Stephanie & Uribe, Martín, 2018. "Learning to live in a liquidity trap," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 120-136.
    31. Martín Uribe, 2017. "The Neo-Fisher Effect in the United States and Japan," NBER Working Papers 23977, National Bureau of Economic Research, Inc.
    32. Andrew Lee Smith, 2015. "When does the cost channel pose a challenge to inflation targeting central banks?," Research Working Paper RWP 15-6, Federal Reserve Bank of Kansas City.
    33. Peter Tillmann, 2009. "Optimal Monetary Policy with an Uncertain Cost Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 885-906, August.
    34. repec:mcb:jmoncb:v:45:y:2013:i::p:535-558 is not listed on IDEAS
    35. Tillmann, Peter, 2009. "The time-varying cost channel of monetary transmission," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 941-953, October.
    36. Glenn D. Rudebusch & Tao Wu, 2004. "The recent shift in term structure behavior from a no-arbitrage macro-finance perspective," Working Paper Series 2004-25, Federal Reserve Bank of San Francisco.
    37. Rabanal, Pau, 2007. "Does inflation increase after a monetary policy tightening? Answers based on an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 906-937, March.
    38. Peter Tillmann, 2009. "Optimal Monetary Policy with an Uncertain Cost Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 885-906, August.
    39. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. William John Tayler & Roy Zilberman, 2019. "Unconventional Policies in State-Contingent Liquidity Traps," Working Papers 257107351, Lancaster University Management School, Economics Department.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chattopadhyay, Siddhartha & Ghosh, Taniya, 2016. "Cost Channel, Interest Rate Pass-Through and Optimal Policy under Zero Lower Bound," MPRA Paper 72762, University Library of Munich, Germany.
    2. Lasitha R. C. Pathberiya, 2016. "Optimal Monetary Policy at the Zero Lower Bound on Nominal Interest Rates in a Cost Channel Economy," Discussion Papers Series 568, School of Economics, University of Queensland, Australia.
    3. Siddhartha Chattopadhyay, 2021. "The Neo-Fisherianism to Escape Zero Lower Bound," International Symposia in Economic Theory and Econometrics, in: Environmental, Social, and Governance Perspectives on Economic Development in Asia, volume 29, pages 1-19, Emerald Group Publishing Limited.
    4. Siddhartha Chattopadhyay & Taniya Ghosh, 2016. "Cost channel, interest rate pass-through and optimal monetary policy under zero lower bound," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2016-012, Indira Gandhi Institute of Development Research, Mumbai, India.
    5. Lucio Gobbi & Ronny Mazzocchi & Roberto Tamborini, 2022. "Monetary policy, rational confidence, and Neo‐Fisherian depressions," Metroeconomica, Wiley Blackwell, vol. 73(4), pages 1179-1199, November.
    6. Siddhartha Chattopadhyay, 2016. "Cost Channel, Interest Rate Pass-Through and Optimal Monetary Policy under Zero Lower Bound," Working Papers id:11075, eSocialSciences.
    7. Florin O. Bilbiie, 2022. "Neo-Fisherian Policies and Liquidity Traps," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 378-403, October.
    8. Rodríguez Arosemena, Nicolás, 2018. "The Dominium Mundi Game and the Case for Artificial Intelligence in Economics and the Law," MPRA Paper 90560, University Library of Munich, Germany.
    9. He Nie & Jordan Roulleau-Pasdeloup, 2023. "The promises (and perils) of control-contingent forward guidance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 77-98, July.
    10. Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2017. "Forward Guidance And The State Of The Economy," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1593-1624, October.
    11. Lansing, Kevin J., 2021. "Endogenous forecast switching near the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 153-169.
    12. Jochen Michaelis & Jakob Palek, 2014. "Optimal Monetary Policy in a Currency Union: Implications of a Country-specific Cost Channel," MAGKS Papers on Economics 201444, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    13. Jordi Galí, 2018. "The State of New Keynesian Economics: A Partial Assessment," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 87-112, Summer.
    14. Chattopadhyay, Siddhartha & Daniel, Betty C., 2014. "The Inflation Target at the Zero Lower Bound," MPRA Paper 66096, University Library of Munich, Germany.
    15. Roberto M. Billi & Jordi Galí, 2020. "Gains from Wage Flexibility and the Zero Lower Bound," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(6), pages 1239-1261, December.
    16. Florin O. Bilbiie, 2019. "Optimal Forward Guidance," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 310-345, October.
    17. Jochen Michaelis, 2012. "Optimal Monetary Policy in a Currency Union: The Role of the Cost Channel," MAGKS Papers on Economics 201203, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    18. Ida, Daisuke & Kaminoyama, Kenichi, 2024. "Effect of a cost channel on monetary policy transmission in a behavioral New Keynesian model," MPRA Paper 120424, University Library of Munich, Germany.
    19. David Finck, 2020. "Forward Guidance Under the Cost Channel," MAGKS Papers on Economics 202004, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    20. Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.

    More about this item

    Keywords

    New-keynesian model; Cost channel; ZLB;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:89:y:2020:i:c:p:351-366. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.