Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg
47 Pages Posted: 9 May 2023
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Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg
Monetary Policy Interactions: The Policy Rate, Asset Purchases and Optimal Policy with an Interest Rate Peg
Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg
Date Written: 2023
Abstract
We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. The “divine coincidence” holds with the nominal short-term rate and central bank balance sheet available as policy tools. Credit spread-targeting balance sheet policy provides a determinate equilibrium with a fixed policy rate. This policy induces similar welfare losses relative to dual-instrument policy as inflation-targeting interest rate policy with a fixed balance sheet.
Keywords: unconventional monetary policy, optimal monetary policy, New Keynesian model, policy rate lower bound, interest rate peg
JEL Classification: E430, E520, E580
Suggested Citation: Suggested Citation