Optimal irreversible monetary policy

• Hasui, Kohei

• Kobayashi, Teruyoshi

• Sugo, Tomohiro

Abstract

Real-world central banks have a strong aversion to policy reversals. Nevertheless, theoretical models of monetary policy within the dynamic general equilibrium framework normally ignore the irreversibility of interest rate control. In this paper, we develop a formal model that incorporates a central bank's discretionary optimization problem with an aversion to policy reversals. We show that, even under a discretionary regime, the optimal timing of liftoff from the zero lower bound is characterized by its history dependence, which arises from the option value to waiting, and there exists an optimal degree of policy irreversibility at which the social loss is minimized.

Journal

• European Economic Review

  European Economic Review 134 103707-, 2021-05

  Elsevier B.V.

Keywords

• Monetary policy
• Policy irreversibility
• Reversal aversion
• Liquidity trap

Details

• CRID: 1050013861703859712
• NII Article ID: 120007002562
• NII Book ID: AA00173478
• DOI: 10.1016/j.euroecorev.2021.103707
• HANDLE: 20.500.14094/90008060
• ISSN: 00142921
• Web Site: https://api.elsevier.com/content/article/PII:S001429212100060X?httpAccept=text/xml
• Web Site: https://api.elsevier.com/content/article/PII:S001429212100060X?httpAccept=text/plain
• Text Lang: en
• Article Type: journal article
• Data Source:
  • IRDB
  • Crossref
  • CiNii Articles
  • KAKEN