Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank

Jeanne, Olivier; Svensson, Lars E. O.

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Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank

IMF Working Paper No. 04/162

44 Pages Posted: 15 Feb 2006

See all articles by Olivier Jeanne

Olivier Jeanne

International Monetary Fund (IMF) - Research Department; Ecole Nationale des Ponts et Chaussees (ENPC); Centre for Economic Policy Research (CEPR)

Lars E. O. Svensson

Stockholm School of Economics; Stockholm University - Institute for International Economic Studies (IIES); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

There are 3 versions of this paper

Date Written: September 2004

Abstract

An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson`s Foolproof Way to escape from a liquidity trap.

Keywords: Zero lower bound for interest rates, deflation

JEL Classification: E52, F31, F41

Suggested Citation: Suggested Citation

Jeanne, Olivier and Svensson, Lars E.O., Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank (September 2004). IMF Working Paper No. 04/162, Available at SSRN: https://ssrn.com/abstract=878987