Pegging the interest rate on bank reserves: A resolution of New Keynesian puzzles and paradoxes
| Autor: | Olivier Loisel, Behzad Diba |
|---|---|
| Rok vydání: | 2021 |
| Předmět: |
Economics and Econometrics
Determinacy Keynesian economics media_common.quotation_subject 05 social sciences Monetary economics Paradox of flexibility Forward guidance Interest rate NK model Liquidity trap 0502 economics and business New Keynesian economics Economics Bank reserves 050207 economics Paradox of toil Finance Stock (geology) 050205 econometrics media_common |
| Zdroj: | Journal of Monetary Economics. 118:230-244 |
| ISSN: | 0304-3932 |
| DOI: | 10.1016/j.jmoneco.2020.10.002 |
| Popis: | We develop a model of monetary policy with a simple departure from the basic New Keynesian (NK) model. In this model, the central bank sets independently the interest rate on bank reserves and the nominal stock of bank reserves. Because reserves reduce the costs of banking, the model delivers local-equilibrium determinacy under a permanent interest-rate peg. As a result, it does not share the puzzling and paradoxical implications of the basic NK model under a temporary interest-rate peg (e.g., in the context of a liquidity trap). More specifically, it offers a resolution of the "forward-guidance puzzle," a related puzzle about fiscal multipliers, and the "paradox of flexibility," even for an arbitrarily small departure from the basic NK model (i.e., arbitrarily small banking costs). It still solves or attenuates these puzzles and paradox for a vanishingly small departure, and also solves the "paradox of toil" in that case. This limit result provides an equilibrium-selection device in the basic NK model, and brings this canonical sticky-price model at par with its sticky-information counterpart in terms of their ability to solve or attenuate the four puzzles and paradoxes. |
| Databáze: | OpenAIRE |
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