Optimal monetary policy mix at the zero lower bound
Optimal monetary policy mix at the zero lower bound
We study the optimal mix of forward guidance and quantitative easing at the ZLB. The welfare loss function depends on inflation, output, and consumption heterogeneity (which we label as inequality) between different households. When solely focusing on inflation and output, the central bank excessively expands its balance sheet, thereby increasing inequality. Forward guidance is more effective at stabilising inflation, and quantitative easing at stabilising output. The two tools are, therefore, complementary. Since neither instrument can fully neutralise adverse demand shocks, the optimal policy combines both, resulting in a shorter ZLB duration and milder balance-sheet expansion than if the central bank relied on one policy instrument alone.
Forward guidance, Optimal monetary policy, Quantitative easing, Unconventional monetary policy, Zero lower bound
Bonciani, Dario
a2b065a5-415c-4554-8d3a-4087e80b7598
Oh, Joonseok
020d4770-4b18-4b76-bf81-d3e58b9f4eed
26 November 2024
Bonciani, Dario
a2b065a5-415c-4554-8d3a-4087e80b7598
Oh, Joonseok
020d4770-4b18-4b76-bf81-d3e58b9f4eed
Bonciani, Dario and Oh, Joonseok
(2024)
Optimal monetary policy mix at the zero lower bound.
Journal of Economic Dynamics and Control, 170, [105001].
(doi:10.1016/j.jedc.2024.105001).
Abstract
We study the optimal mix of forward guidance and quantitative easing at the ZLB. The welfare loss function depends on inflation, output, and consumption heterogeneity (which we label as inequality) between different households. When solely focusing on inflation and output, the central bank excessively expands its balance sheet, thereby increasing inequality. Forward guidance is more effective at stabilising inflation, and quantitative easing at stabilising output. The two tools are, therefore, complementary. Since neither instrument can fully neutralise adverse demand shocks, the optimal policy combines both, resulting in a shorter ZLB duration and milder balance-sheet expansion than if the central bank relied on one policy instrument alone.
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Optimal Monetary Policy Mix at the Zero Lower Bound
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1-s2.0-S0165188924001933-main
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Accepted/In Press date: 15 November 2024
e-pub ahead of print date: 20 November 2024
Published date: 26 November 2024
Keywords:
Forward guidance, Optimal monetary policy, Quantitative easing, Unconventional monetary policy, Zero lower bound
Identifiers
Local EPrints ID: 496868
URI: http://eprints.soton.ac.uk/id/eprint/496868
ISSN: 0165-1889
PURE UUID: d0d2ea9b-061a-4e40-afbc-b140d055623e
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Date deposited: 08 Jan 2025 11:25
Last modified: 22 Aug 2025 02:42
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Author:
Dario Bonciani
Author:
Joonseok Oh
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