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STABILIZATION POLICY AT THE ZERO LOWER BOUND
Author(s) -
Boel Paola,
Waller Christopher J.
Publication year - 2019
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12396
Subject(s) - zero lower bound , economics , liquidity trap , monetary policy , monetary economics , friedman rule , market liquidity , constraint (computer aided design) , externality , nominal interest rate , liquidity constraint , aggregate demand , zero (linguistics) , interest rate , forward guidance , general equilibrium theory , aggregate (composite) , taylor rule , central bank , microeconomics , inflation targeting , liquidity risk , credit channel , real interest rate , mechanical engineering , linguistics , philosophy , materials science , composite material , engineering
Abstract We construct a monetary economy with aggregate liquidity shocks and heterogeneous idiosyncratic preference shocks. In this environment, not all agents are satiated at the zero lower bound (ZLB) even when the Friedman rule is the best interest‐rate policy the central bank can implement. As a consequence, central bank stabilization policy, which takes the form of repo arrangements in response to aggregate demand shocks, temporarily relaxes the liquidity constraint of impatient agents at the ZLB. Due to a pecuniary externality, this policy may have beneficial general equilibrium effects for patient agents even if they are unconstrained in their money balances.