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Thursday, June 04, 2015

'Optimal Monetary Policy at the Zero Lower Bound'

Continuing this week's tradition of highlighting new academic research people send to me, Jams Bullard, President of the St. Louis Fed, emails a link to his new paper that can be "broadly viewed" as supporting nominal GDP targeting (with coauthors Costas Azariadis, Aarti Singh, and Jacek Suda):

Optimal Monetary Policy at the Zero Lower Bound, by Costas Azariadis, James Bullard, Aarti Singh, and Jacek Suda: Abstract We study optimal monetary policy at the zero lower bound. The macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). A second, small group of households only uses cash and cannot participate in the credit market. The monetary authority sup- plies currency to cash-using households in a way that changes the price level to provide for optimal risk-sharing in the private credit market and thus to overcome the NSCNC friction. For sufficiently large and persistent negative shocks the zero lower bound on nominal interest rates may threaten to bind. The monetary authority may credibly promise to increase the price level in this situation to maintain a smoothly functioning (complete) credit market. The optimal monetary policy in this model can be broadly viewed as a version of nominal GDP targeting.

    Posted by on Thursday, June 4, 2015 at 09:56 AM Permalink  Comments (11)


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