Dynamic Debt Deleveraging and Optimal Monetary Policy

48 Pages Posted: 6 Oct 2014

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Gauti B. Eggertsson

Federal Reserve Bank of New York

Federica Romei

Luiss Guido Carli University

Multiple version iconThere are 2 versions of this paper

Date Written: October 2014

Abstract

This paper studies optimal monetary policy under dynamic debt deleveraging once the zero bound is binding. Unlike the existing literature, the natural rate of interest is endogenous and depends on macroeconomic policy. Optimal monetary policy successfully raises the natural rate of interest by creating an environment that speeds up deleveraging, thus endogenously shortening the duration of the crisis and a binding zero bound. Inflation should be front loaded. Fiscal-policy multipliers can be even higher than in existing models, but depend on the way in which public spending is financed.

Suggested Citation

Benigno, Pierpaolo and Eggertsson, Gauti B. and Romei, Federica, Dynamic Debt Deleveraging and Optimal Monetary Policy (October 2014). NBER Working Paper No. w20556. Available at SSRN: https://ssrn.com/abstract=2505861

Pierpaolo Benigno (Contact Author)

Luiss Guido Carli University

Viale Romania 32
Rome, Roma 00197
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Gauti B. Eggertsson

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Federica Romei

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

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