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Fra 1999 og senere er publikasjonene tilgjengelige påwww.norges-bank.no Working papers inneholder forskningsarbeider og utredninger som vanligvis ikke har fått sin e4ndelige form. Hensikten er blant annet at forfatteren kan motta...more

Fra 1999 og senere er publikasjonene tilgjengelige påwww.norges-bank.no Working papers inneholder forskningsarbeider og utredninger som vanligvis ikke har fått sin e4ndelige form. Hensikten er blant annet at forfatteren kan motta kommentarer fra kolleger og andre interesserte. Synspunkter og konklusjoner i arbeidene står for forfatternes regning.

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts....more

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts. When banks face a lower bound on customer deposit rates, an asset swap between securities and reserves reduces banks' net worth as the cost of holding reserves cannot be matched with a reduction in their cost of funding. Exploiting euro-area syndicated lending data and the German credit registry, we provide evidence that deposit-reliant banks with relatively higher funding costs and greater exposure to large-scale asset purchases reduce corporate lending relatively more, have lower stock returns, and rebalance their interbank lending from safe to risky countries.

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts....more

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts. When banks face a lower bound on customer deposit rates, an asset swap between securities and reserves reduces banks' net worth as the cost of holding reserves cannot be matched with a reduction in their cost of funding. Exploiting euro-area syndicated lending data and the German credit registry, we provide evidence that deposit-reliant banks with relatively higher funding costs and greater exposure to large-scale asset purchases reduce corporate lending relatively more, have lower stock returns, and rebalance their interbank lending from safe to risky countries.

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts....more

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts. When banks face a lower bound on customer deposit rates, an asset swap between securities and reserves reduces banks' net worth as the cost of holding reserves cannot be matched with a reduction in their cost of funding. Exploiting euro-area syndicated lending data and the German credit registry, we provide evidence that deposit-reliant banks with relatively higher funding costs and greater exposure to large-scale asset purchases reduce corporate lending relatively more, have lower stock returns, and rebalance their interbank lending from safe to risky countries.

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts....more

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts. When banks face a lower bound on customer deposit rates, an asset swap between securities and reserves reduces banks' net worth as the cost of holding reserves cannot be matched with a reduction in their cost of funding. Exploiting euro-area syndicated lending data and the German credit registry, we provide evidence that deposit-reliant banks with relatively higher funding costs and greater exposure to large-scale asset purchases reduce corporate lending relatively more, have lower stock returns, and rebalance their interbank lending from safe to risky countries.

In this paper, we study the effect of a credit supply shock on the distribution of wages within and between firms. We construct a novel dataset combining administrative linked employer-employee data with information on firms’ preexisting...more

In this paper, we study the effect of a credit supply shock on the distribution of wages within and between firms. We construct a novel dataset combining administrative linked employer-employee data with information on firms’ preexisting bank relationships in the credit market. We use the introduction of negative monetary policy rates in the euro area as a source of variation in banks’ credit supply to firms in Germany. We find that this credit supply shock leads to higher within-firm wage inequality at more affected employers. At the same time, we find a reduction in between-firmwage inequality due to relatively higher average wages among initially lower-paying employers. Our results suggest that monetary policy can have important distributional consequences through affecting credit supply and firm pay heterogeneity. JEL classification: D22, G21, G31, G32, J31

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts....more

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts. When banks face a lower bound on customer deposit rates, an asset swap between securities and reserves reduces banks' net worth as the cost of holding reserves cannot be matched with a reduction in their cost of funding. Exploiting euro-area syndicated lending data and the German credit registry, we provide evidence that deposit-reliant banks with relatively higher funding costs and greater exposure to large-scale asset purchases reduce corporate lending relatively more, have lower stock returns, and rebalance their interbank lending from safe to risky countries.

In this article, we review the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We...more

In this article, we review the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks' retail deposit rates is hindered by a zero lower bound. We summarize existing research on the impact of negative rates on banks' lending and securities portfolios as well as their consequences for the real economy. Finally, we discuss the role of different initial conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies.

We examine global economic dynamics under infinite-horizon learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja ( ), we find that under normal monetary and...more

We examine global economic dynamics under infinite-horizon learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja ( ), we find that under normal monetary and fiscal policy the intended steady state is locally but not globally stable. Unstable deflationary paths can arise after large pessimistic shocks to expectations. For large expectation shocks pushing interest rates to the zero lower bound, temporary increases in government spending can be used to insulate the economy from deflation traps.

Many central banks have lowered their interest rates close to zero in response to the crisis since 2008. In standard monetary models the zero lower bound (ZLB) constraint implies the existence of a second steady state in addition to the...more

Many central banks have lowered their interest rates close to zero in response to the crisis since 2008. In standard monetary models the zero lower bound (ZLB) constraint implies the existence of a second steady state in addition to the inflation-targeting steady state. Large scale asset purchases (APP) have been used as a tool for easing of monetary policy in the ZLB regime. I provide a theoretical discussion of these issues using a stylized general equilibrium model in a global nonlinear setting. I also review briefly the empirical literature about effects of APP's.

Two explanations compete to explain the 2008 recession. Both start with a combination of real shocks due to a fall in housing wealth and a fall in real income from an increase in energy prices. One explanation emphasizes propagation of...more

Two explanations compete to explain the 2008 recession. Both start with a combination of real shocks due to a fall in housing wealth and a fall in real income from an increase in energy prices. One explanation emphasizes propagation of this shock through ...

This paper shows that depending on the distribution of banks' uncertain liquidity needs and on how monetary policy is implemented, frictions in the interbank market may reinforce the effectiveness of monetary policy. These frictions imply...more

This paper shows that depending on the distribution of banks' uncertain liquidity needs and on how monetary policy is implemented, frictions in the interbank market may reinforce the effectiveness of monetary policy. These frictions imply that with its lending and deposit facilities the central bank has an additional effective instrument at hand to impose an impact on bank loan supply. While lowering the rate on the lending facility has, taken for itself, an expansionary effect, lowering the rate on the deposit facility has a contractionary effect. This result has interesting implications for monetary policy implementation at the zero lower bound.

In March 2015, the Eurosystem launched its QE programme. The asset purchases induced a rapid and strong increase in excess reserves, implying a structural liquidity surplus in the euro area banking sector. Against this background, the...more

In March 2015, the Eurosystem launched its QE programme. The asset purchases induced a rapid and strong increase in excess reserves, implying a structural liquidity surplus in the euro area banking sector. Against this background, the first part of this paper analyses the Eurosystem’s liquidity management duringnormal times,crisis timesandtimes of too low inflation. With a focus on the latter, the second part of this paper develops a relatively simple theoretical model in which banks operate under a structural liquidity surplus. The model shows that increasing excess reserves have no or even a contractionary impact on bank loan supply. As the newly created excess reserves are heterogeneously distributed across euro area countries, the impact of QE on bank loan supply may differ across countries. Moreover, we derive implications for monetary policy implementation. Increases in the central bank’s main refinancing rate as well as in the minimum reserve ratio and decreases in the centra...

The adoption of a "makeup" strategy is one of the proposals in the ongoing review of the Fed's monetary policy framework. Another suggestion, to avoid the zero lower bound, is a more active role for fiscal policy. We put together these...more

The adoption of a "makeup" strategy is one of the proposals in the ongoing review of the Fed's monetary policy framework. Another suggestion, to avoid the zero lower bound, is a more active role for fiscal policy. We put together these ideas to study monetary-fiscal interactions under price level targeting. Under price level targeting and a fiscally-led regime, we find that following a deflationary demand shock: (i) the central bank increases (rather than decreases) the policy rate; (ii) the central bank, thus, avoids the zero lower bound; (iii) price level targeting is generally welfare improving if compared to inflation targeting.

This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. In this context, we establish five main results: (i) Economies...more

This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. In this context, we establish five main results: (i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses; (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap-a phenomenon we dub the "reserve currency paradox"; (iii) While more price and wage flexibility exacerbates the risk of a deflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession; (iv) Beggar-thy-neighbor exchange rate devaluations provide stimulus to the undertaking country at the expense of other countries (zero-sum); and (v) Safe public debt issuances, helicopter drops of money, and increases in government spending in any country are expansionary for all countries (positive-sum). We use these results to shed light on the evolution of global imbalances, interest rates, and exchange rates since the beginning of the global financial crisis.

How does informality in emerging economies affect the conduct of monetary policy? To answer this question we construct a two-sector, formal-informal new Keynesian closed-economy. The informal sector is more labour intensive, is untaxed,...more

How does informality in emerging economies affect the conduct of monetary policy? To answer this question we construct a two-sector, formal-informal new Keynesian closed-economy. The informal sector is more labour intensive, is untaxed, has a classical labour market, faces high credit constraints in financing investment and is less visible in terms of observed output. We compare outcomes under welfare-optimal monetary policy, discretion and welfare-optimized interest-rate Taylor rules building the model in stages; first with no frictions in these two markets, then with frictions in only the formal labour market and finally with frictions on both credit markets and the formal labour market. Our main conclusions are first, labour and financial market frictions, the latter assumed to be stronger in the informal sector, cause the time-inconsistency problem to worsen. The importance of commitment therefore in- creases in economies characterized by a large informal sector with the feature...

In the general setting, consensus cannot be solved if an adversary controls a third of the system. Yet, blockchain participants typically reach consensus "eventually" despite an adversary controlling a minority of the system. Exceeding...more

In the general setting, consensus cannot be solved if an adversary controls a third of the system. Yet, blockchain participants typically reach consensus "eventually" despite an adversary controlling a minority of the system. Exceeding this 1 3 cap is made possible by tolerating transient disagreements, where distinct participants select distinct blocks for the same index, before eventually agreeing to select the same block. Until now, no blockchain could tolerate an attacker controlling a majority of the system. In this paper, we present Zero-Loss Blockchain (ZLB ), the first blockchain that tolerates an adversary controlling more than half of the system. ZLB is an open blockchain that combines recent theoretical advances in accountable Byzantine agreement to exclude undeniably deceitful replicas. Interestingly, ZLB does not need a known bound on the delay of messages but progressively reduces the portion of deceitful replicas below 1 3 , and reaches consensus. Geo-distributed experiments show that ZLB outperforms HotStuff and is almost as fast as the scalable Red Belly Blockchain that cannot tolerate n/3 faults.

Over the last two years, several central banks in Europe have adopted NIRP to achieve price stability and/or reduce appreciation pressures. Negative interest rates have supported easier financial conditions and contributed to a modest...more

Over the last two years, several central banks in Europe have adopted NIRP to achieve price stability and/or reduce appreciation pressures. Negative interest rates have supported easier financial conditions and contributed to a modest expansion in credit, demonstrating that the zero lower bound (ZLB) is less binding than previously thought, including with respect to central banks’ signaling capacity. In some countries, a tiered central bank deposit rate has facilitated the pass-through to money markets, while mitigating the direct costs of negative rates to banks. Nevertheless, going forward, reduced bank profitability might override possible mitigating effects from higher asset prices and could impair the transmission to lower lending rates as interest rates become more negative and deposit rates remain sticky. More monetary accommodation will need to rely on credit easing measures amid a continued expansion of the ECB’s balance sheet. This also highlights the need for a more balan...

I thank Mike Woodford for encouraging me to write this paper, and Sofia Bauducco and participants at the Central Bank of Chile Annual Conference for helpful discussions, comments, and suggestions. I gratefully acknowledge funding from the...more

I thank Mike Woodford for encouraging me to write this paper, and Sofia Bauducco and participants at the Central Bank of Chile Annual Conference for helpful discussions, comments, and suggestions. I gratefully acknowledge funding from the Central Bank of Chile for this research. The views expressed in this paper are my own and do not necessarily reflect the views of the individuals or groups listed above. All errors and omissions are my own. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

We propose a shadow policy interest rate based on an estimated structural model that accounts for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an...more

We propose a shadow policy interest rate based on an estimated structural model that accounts for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance and other unconventional policies that extend the expected duration of zero-interest-rate policy are expansionary and decrease the shadow rate. By quantifying these distinct effects, our structural shadow federal funds rate better captures the stance of monetary policy given economic conditions than a shadow rate based only on the term structure of interest rates.

This paper explores different fiscal stimuli within a business cycle model with an endogenous number of firms. We demonstrate that a changing number of firms is a crucial dimension for evaluating fiscal policy since it accelerates the...more

This paper explores different fiscal stimuli within a business cycle model with an endogenous number of firms. We demonstrate that a changing number of firms is a crucial dimension for evaluating fiscal policy since it accelerates the impacts of fiscal policy. In the presence of demand stimuli fiscal multipliers are small and the number of firms may decline, in particular under distortionary tax financing. Policies that disburden private agents from income taxes, on the other hand, are effective in boosting economic activity and new firm creation. --

For a long time now, the monetary policies in the US and other industrialized countries have been a regime of cheap money with the interest rate often being negative. A low interest rate in the framework of the Keynesian monetary policy...more

For a long time now, the monetary policies in the US and other industrialized countries have been a regime of cheap money with the interest rate often being negative. A low interest rate in the framework of the Keynesian monetary policy stimulates demand but is hard on the retirees who are mostly on a fixed income. This paper generates a simple model to understand the interaction between current wealth, savings rate, interest rate and retirement age. The model also suggests a lower bound on the interest rate. The minimum interest rate at which Americans of median age with median wealth and median income, and retiring at the age of 67, turns out to be 10%.

This paper investigates the predictive power of the shadow rate for the inflation rate in countries with a zero lower bound (the US, the UK and Canada) and in those with negative rates (Japan, the Euro Area and Switzerland). Using shadow...more

This paper investigates the predictive power of the shadow rate for the inflation rate in countries with a zero lower bound (the US, the UK and Canada) and in those with negative rates (Japan, the Euro Area and Switzerland). Using shadow rates obtained from two different models (the Wu-Xia ( ) and the Krippner (2015a) ones) and for different lower bound parameters we compare the out-of-sample forecasting performance of an inflation model including a shadow rate interaction term with a benchmark one excluding it. Both specifications are estimated by OLS (Ordinary Least Squares) and includes a range of macroeconomic factors computed by means of principal component analysis. Both point and density forecasts of the inflation rate are evaluated. The models including the shadow rate interaction term are found to outperform the benchmark ones according to both sets of criteria except in countries operating an official inflation targeting regime. The presence or absence of a zero lower bound affects which type of shadow rate produces more accurate inflation forecasts.

This paper proposes to assess the usefulness of central banks forward guidance since the start of the global economic crisis. Using a novel approach, the Wordscores methodology, we reveal that since 2009, central banks do provide a...more

This paper proposes to assess the usefulness of central banks forward guidance since the start of the global economic crisis. Using a novel approach, the Wordscores methodology, we reveal that since 2009, central banks do provide a temporal guidance of their accommodative policy that can be relied on and expected. Central banks communication thus gives important insights to financial markets about the persistence of their unconventional measures and in particular about the occurrence of an exit strategy.

This paper models an emerging economy with financial dollarization features within an optimizing, stochastic general equilibrium setup. One key result in this framework is that unexpected nominal exchange rate depreciations are positively...more

This paper models an emerging economy with financial dollarization features within an optimizing, stochastic general equilibrium setup. One key result in this framework is that unexpected nominal exchange rate depreciations are positively correlated with the probability of default by borrower firms and turn out to be a powerful mechanism to affect aggregate consumption. Throughout the monetary policy evaluation exercises performed, the sign of the unexpected depreciation is positively correlated to the real value of assets and negatively correlated to aggregate consumption. This result supports the idea that unexpected exchange rate depreciations are contractionary and not expansionary if dollarization and agency costs in the financial sector are considered. JEL Classification: E31, E44, F41, G21

h i g h l i g h t s • We study the Modigliani-Miller Theorem with incomplete markets and trading limits. • There exist state-dependent limits under which financial policy is irrelevant. • A no short-selling limit on equity is innocuous in...more

h i g h l i g h t s • We study the Modigliani-Miller Theorem with incomplete markets and trading limits. • There exist state-dependent limits under which financial policy is irrelevant. • A no short-selling limit on equity is innocuous in spite of being state-independent.

This paper studies how the views of sophisticated traders are impounded into stocks and bonds around macroeconomic news announcements. I find evidence that sophisticated traders trade on predictions of macroeconomic news reports before...more

This paper studies how the views of sophisticated traders are impounded into stocks and bonds around macroeconomic news announcements. I find evidence that sophisticated traders trade on predictions of macroeconomic news reports before announcements and obtain their informational advantage using public information. Specifically, consensus forecasts of upcoming data releases suffer from anchoring bias and overweight past data releases. By correcting this bias, sophisticated traders can predict news reports. The results suggest that stock and bond markets are inefficient in this setting. Over time, there is a late trading puzzle: sophisticated traders can predict news reports days before announcements but appear to trade these predictions into stock and bond prices just hours before announcements. Across assets there is a related puzzle: the predictable component of news reports is eventually fully impounded into bonds but only partially impounded into stocks. Stocks but not bonds rea...

This article assesses the importance of the zero lower bound on nominal 'interest rates for the conduct of monetary policy. The article ~ employs a small, forward.looking model developed by Fuhrer and Moore. The model is simulated under...more

This article assesses the importance of the zero lower bound on nominal 'interest rates for the conduct of monetary policy. The article ~ employs a small, forward.looking model developed by Fuhrer and Moore. The model is simulated under several policy rules that involve eittler high-or low-inflation targets~ We determine the extent to which the zero bound on nominal interest rates prevents real interest rates from falling in response to negative spending shocks, and thus cushioning aggregate output, when zero inflation results in low nominal rates. In general, the results suggest that real long-term interest rates drop considerably in response to an adverse spending shock under a variety of policy rules and inflation rates. The extent of the decline in long real rates, and thus the ability of monetary policy to cushion such shocks, generally depends to only a modest extent on the level of inflation. For relatively small and short-lived spending shocks, as well as for permanent and large shocks, the path of output in the zero inflation case is only a little below that in the higher inflation. But for large shocks persisting a few quarters, differences in output paths across high-and low-inflation scenarios can be larger. Without a doubt, these results are somewhat model-specific, and their reaI-wo~rld implications depend on how quickly a central bank can recognize shocks and how vigorously it can respond to them. Moreover, in situations when the zero bound on nominal interest rates does limit the ability of the central bank to stimulate the economy by reducing interest rates, other policy tools--such as fiscal policy may still be effective. Nonetheless, this research suggests that the constraint on monetary policy posed by the zero bound is an issue that merits careful thought and perhaps further investigation in alternative model settings.

Any opinions expressed here are those of the author(s) and not those of WHU. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. WHU Working Papers often...more

Any opinions expressed here are those of the author(s) and not those of WHU. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. WHU Working Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author.

Any opinions expressed here are those of the author(s) and not those of WHU. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. WHU Working Papers often...more

Any opinions expressed here are those of the author(s) and not those of WHU. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. WHU Working Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author.

In this paper we set up a small open economy model with financial frictions, following Curdia and Woodford (2010)'s model. Unlike other results in the literature such as Curdia and Woodford (2010), and Taylor ( ), we find that optimal...more

In this paper we set up a small open economy model with financial frictions, following Curdia and Woodford (2010)'s model. Unlike other results in the literature such as Curdia and Woodford (2010), and Taylor ( ), we find that optimal monetary policy should not respond to changes in domestic interest rate spreads when the source of fluctuations are exogenous financial shocks. A novel result here is that the optimal size of policy responses to changes in the credit spread is large when the disturbance source are shocks to the foreign interest rate. Our results suggest that such a response is welfare enhancing.

The authors consider inflation and government debt dynamics when monetary policy employs a global interest rate rule and private agents forecast using adaptive learning. Because of the zero lower bound on interest rates, active interest...more

The authors consider inflation and government debt dynamics when monetary policy employs a global interest rate rule and private agents forecast using adaptive learning. Because of the zero lower bound on interest rates, active interest rate rules are known to imply the existence of a second, low inflation steady state, below the target inflation rate. Under adaptive learning dynamics the authors find the additional possibility of a liquidity trap, in which the economy slips below this low inflation steady state and is driven to an even lower inflation floor that is supported by a switch to an aggressive money supply rule. Fiscal policy alone cannot push the economy out of the liquidity trap. However, raising the threshold at which the money supply rule is employed can dislodge the economy from the liquidity trap and ensure a return to the target equilibrium.

, countries that cut their policy interest rates close to zero turned, among other policies, to forward guidance. We estimate a two-country model of the U.S. and Canada to quantify how unexpected changes in U.S. forward guidance affected...more

, countries that cut their policy interest rates close to zero turned, among other policies, to forward guidance. We estimate a two-country model of the U.S. and Canada to quantify how unexpected changes in U.S. forward guidance affected Canada. Expansionary U.S. forward guidance shocks, like conventional policy shocks, are beggarthyneighbor and depress Canadian output, but by twice as much as conventional shocks. We find that the effect of U.S. forward guidance shocks on Canadian output, unlike conventional policy shocks, depends on the state of U.S. demand and can be five times smaller when U.S. demand is weak.

Motivated by the increasing use of forward guidance, we consider DSGE models in which the central bank holds the policy rate fixed for an extended period of time. Private agents' beliefs about how long the fixed-rate regime will last...more

Motivated by the increasing use of forward guidance, we consider DSGE models in which the central bank holds the policy rate fixed for an extended period of time. Private agents' beliefs about how long the fixed-rate regime will last influences current output and inflation. We estimate the structural parameters for US data and infer the expected duration of the zero lower bound regime. Our results suggest that the average expected duration is around 3 quarters and has varied significantly since the onset of the zero lower bound regime, with changes that can be related to the Federal Reserve's forward guidance.

In a model where the risk premium on long-term debt is, in part, endogenously determined, we study two kinds of unconventional monetary policy: longterm nominal interest rates as operating instruments of monetary policy and announcements...more

In a model where the risk premium on long-term debt is, in part, endogenously determined, we study two kinds of unconventional monetary policy: longterm nominal interest rates as operating instruments of monetary policy and announcements about the future path of the short-term rate. We find that both policies are consistent with unique equilibria, that long-term interest rate rules can perform better than conventional Taylor rules, and that, at the zero lower bound, announcements about the future path of the short-term rate can lower long-term interest rates through their impact on both expectations and the risk premium. With simulations, we show that long-term interest rate rules generate sensible dynamics both when in operation and when expected to be applied.

We examine the impact of fiscal policy interventions in an environment where the short term nominal interest rate is at the zero bound. In the basic New Keynesian model in which the monetary authority operates a Taylor rule, globally...more

We examine the impact of fiscal policy interventions in an environment where the short term nominal interest rate is at the zero bound. In the basic New Keynesian model in which the monetary authority operates a Taylor rule, globally multiple equilibria arise, some of which display all the features of a liquidity trap. A loss in confidence can set the economy on a deflationary path that eventually prevents the monetary authority from adjusting the interest rate and can lead to potentially very large output drops. Contrary to a line of recent papers, we find that demand stimulating policies become less effective in a liquidity trap than in normal circumstances. The key reason is that demand stimulus leads agents to believe that things are even worse than they thought. In contrast, supply side policies, such as cuts in labor income taxes, lead to relative optimism and become more powerful.

This paper estimates the dynamic effects of changes in taxes in the United States. We distinguish between the effects of changes in personal and corporate income taxes using a new narrative account of federal tax liability changes in...more

This paper estimates the dynamic effects of changes in taxes in the United States. We distinguish between the effects of changes in personal and corporate income taxes using a new narrative account of federal tax liability changes in these two tax components. We develop an estimator in which narratively identified tax changes are used as proxies for structural tax shocks and apply it to quarterly post WWII US data. We find that short run output effects of tax shocks are large and that it is important to distinguish between different types of taxes when considering their impact on the labor market and the major expenditure components.

This paper extends the model in Kiyotaki and Moore (2008) to include nominal wage and price frictions and explicitly incorporates the zero bound on the short-term nominal interest rate. We subject this model to a shock which arguably...more

This paper extends the model in Kiyotaki and Moore (2008) to include nominal wage and price frictions and explicitly incorporates the zero bound on the short-term nominal interest rate. We subject this model to a shock which arguably captures the 2008 US financial crisis. Within this framework we ask: Once interest rate cuts are no longer feasible due to the zero bound, what are the effects of non-standard open market operations in which the government exchanges liquid government liabilities for illiquid private assets? We find that the effect of this non-standard monetary policy can be large at zero nominal interest rates. We show model simulations in which these policy interventions prevented a repeat of the Great Depression in 2008-2009. The views expressed herein are solely those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System. We thank Sonia Gilbukh for outstanding research assistance. We also thank John ...

This paper presents a toolkit to solve for equilibrium in economies with the effective lower bound (ELB) on the nominal interest rate in a computationally efficient way under a special assumption about the underlying shock process, a...more

This paper presents a toolkit to solve for equilibrium in economies with the effective lower bound (ELB) on the nominal interest rate in a computationally efficient way under a special assumption about the underlying shock process, a two-state Markov process with an absorbing state. We illustrate the algorithm in the canonical New Keynesian model, replicating the optimal monetary policy in , as well as showing how the toolkit can be used to analyze the medium scale DSGE model developed by the Federal Reserve Bank of New York. As an application, we show how well various policy rules perform relative to the optimal commitment equilibrium. A key conclusion is that previously suggested policy rules -such as price level targeting and nominal GDP targeting -do not perform well when there is a small drop in the price level, as observed during the Great Recession, because they do not imply sufficiently strong commitment to low future interest rates ("make-up strategy"). We propose two new policy rules, Cumulative Nominal GDP Targeting Rule and Symmetric Dual-Objective Targeting Rule that are more robust.

Fra 1999 og senere er publikasjonene tilgjengelige påwww.norges-bank.no Working papers inneholder forskningsarbeider og utredninger som vanligvis ikke har fått sin endelige form. Hensikten er blant annet at forfatteren kan motta...more

Fra 1999 og senere er publikasjonene tilgjengelige påwww.norges-bank.no Working papers inneholder forskningsarbeider og utredninger som vanligvis ikke har fått sin endelige form. Hensikten er blant annet at forfatteren kan motta kommentarer fra kolleger og andre interesserte. Synspunkter og konklusjoner i arbeidene står for forfatternes regning.

We thank seminar participants at Brown University and the Federal Reserve Bank of Boston for helpful comments and suggestions. All errors are our own.The views expressed herein are those of the authors and do not necessarily reflect the...more

We thank seminar participants at Brown University and the Federal Reserve Bank of Boston for helpful comments and suggestions. All errors are our own.The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

We propose an open economy model of secular stagnation and show how it can be transmitted from one country to another via current account imbalances. While current account surpluses normally lower interest rates in the recipient country,...more

We propose an open economy model of secular stagnation and show how it can be transmitted from one country to another via current account imbalances. While current account surpluses normally lower interest rates in the recipient country, in a secular stagnation, surpluses transmit recessions due to the zero lower bound on nominal interest rates. In general monetary policies and those directed at competitiveness have negative externalities on trading partners in these circumstances, while fiscal policies and those directed at stimulating domestic demand have positive externalities. This, in a positive sense, explains why the world has relied so much on monetary policies relative to fiscal policies in the wake of the financial crisis and in a normative sense points towards the desirability of fiscal policies. Fiscal policies in response to a secular stagnation are self-financing as in De Long and Summers (2012) in our numerical experiments and a one shot increase in debt will raise demand and is fiscally sustainable. While expansionary monetary policy only provides for a possibility of a better outcome without excluding the possibility of continuing secular stagnation appropriate fiscal policy eliminates secular stagnation by directly raising the natural rate of interest as in Eggertsson and Mehrotra (2014).

We consider the consequences for monetary policy of the zero floor for nominal interest rates. The zero bound can be a significant constraint on the ability of a central bank to combat deflation. We show, in the context of an...more

We consider the consequences for monetary policy of the zero floor for nominal interest rates. The zero bound can be a significant constraint on the ability of a central bank to combat deflation. We show, in the context of an intertemporal equilibrium model, that open-market operations, even of "unconventional" types, are ineffective if they do not change expectations about the future conduct of policy; in this sense, a "liquidity trap" is possible. Nonetheless, a credible commitment to the right sort of history-dependent policy can largely mitigate the distortions created by the zero bound. In our model, optimal policy involves a commitment to adjust interest rates so as to achieve a time-varying price-level target, when this is consistent with the zero bound. We also discuss ways in which other central-bank actions, while irrelevant apart from their effects on expectations, may help to make credible a central bank's commitment to its target, and consider implications for the policy options currently available for overcoming deflation in Japan.