(Un)Conventional Policy and the Effective Lower Bound

47 Pages Posted: 5 Sep 2019

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)

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Date Written: August 9, 2019

Abstract

We study the optimal combination of interest rate policy and unconventional monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that credit policy can be a powerful substitute for interest rate policy. In the face of shocks that negatively affect banks' monitoring efficiency, unconventional measures insulate the real economy from further deterioration in financial conditions and it may be optimal for the central bank not to cut rates to zero. Thus, credit policy lowers the likelihood of hitting the zero bound constraint. Reductions in the policy rates without non-standard measures are suboptimal as they inefficiently force savers to change their 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 (August 9, 2019). BIS Working Paper No. 804, Available at SSRN: https://ssrn.com/abstract=3436206

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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