(Un)conventional Policy and the Effective Lower Bound

43 Pages Posted: 15 Oct 2018

See all articles by Fiorella De Fiore

Fiorella De Fiore

Bank for International Settlements (BIS) - Monetary and Economic Department

Oreste Tristani

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: October 12, 2018

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.

Keywords: optimal monetary policy, unconventional policies, zero-lower bound, asymmetric information

JEL Classification: E44, E52, E61

Suggested Citation

De Fiore, Fiorella and Tristani, Oreste, (Un)conventional Policy and the Effective Lower Bound (October 12, 2018). ECB Working Paper No. 2183. Available at SSRN: https://ssrn.com/abstract=3266268

Fiorella De Fiore (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Oreste Tristani

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

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