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Working Paper
Liquidity Traps and Monetary Policy: Managing a Credit Crunch
We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. These two frictions give rise to a nontrivial financial market in a monetary economy. A tightening of the collateral constraint results in a recession generated by a credit crunch. The model can be used to study the effects on the main macroeconomic variables, and on the welfare of each individual of alternative monetary and fiscal policies following the credit crunch. The model reproduces several features of the recent financial crisis, such as the persistent negative real interest rates, the ...
Working Paper
Optimal Monetary Policy under Negative Interest Rate
In responding to the extremely weak global economy after the financial crisis in 2008, many industrial nations have been considering or have already implemented negative nominal interest rate policy. This situation raises two important questions for monetary theories: (i) Given the widely held doctrine of the zero lower bound on nominal interest rate, how is a negative interest rate (NIR) policy possible? (ii) Will NIR be effective in stimulating aggregate demand? (iii) Are there any new theoretical issues emerging under NIR policies? This article builds a model to show that (i) money ...
Working Paper
The Macroeconomic Risks of Undesirably Low Inflation
This paper investigates the macroeconomic risks associated with undesirably low inflation using a medium-sized New Keynesian model. We consider different causes of persistently low inflation, including a downward shift in long-run inflation expectations, a fall in nominal wage growth, and a favorable supply-side shock. We show that the macroeconomic effects of persistently low inflation depend crucially on its underlying cause, as well as on the extent to which monetary policy is constrained by the zero lower bound. Finally, we discuss policy options to mitigate these effects.
Working Paper
Quantitative Easing in Joseph's Egypt with Keynesian Producers
This paper considers monetary and fiscal policy when tangible assets can be accumulated after shocks that increase desired savings, like Joseph's biblical prophecy of seven fat years followed by seven lean years. The model?s flexible-price allocation mimics Joseph?s saving to smooth consumption. With nominal rigidities, monetary policy that eliminates liquidity traps leaves the economy vulnerable to confidence recessions with low consumption and investment. Josephean Quantitative Easing, a fiscal policy that purchases either obligations collateralized by tangible assets or the assets ...
Working Paper
Risk Premia at the ZLB: A Macroeconomic Interpretation
Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing ...
Working Paper
Money-Financed Fiscal Programs : A Cautionary Tale
A number of prominent economists and policymakers have argued that money-?nanced ?scal programs (helicopter drops) could be e?cacious in boosting output and in?ation in economies facing persistent economic weakness, very low in?ation, and signi?cant ?scal strains. We employ a fairly conventional macroeconomic model to explore the possible e?ects of such policies. While we do ?nd that money-?nanced ?scal programs, if communicated successfully and seen as credible by the public, could provide signi?cant stimulus, we underscore the risks that would be associated with such a program. These risks ...
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Liquidity Traps and Monetary Policy: Managing a Credit Crunch
We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the ?nancial crisis that unraveled in 2007 in the United States. The model can be used to study the effects of the credit-crunch on the main macroeconomic variables and the impact of alternative policies. The policy implications regarding forward guidance are in contrast with the prevalent view in most central banks, based on the New Keynesian explanation of the liquidity ...