Taylor-Rule Exit Policies for the Zero Lower Bound

Chattopadhyay, Siddhartha and Daniel, Betty C. (2015): Taylor-Rule Exit Policies for the Zero Lower Bound.

Abstract

The monetary authority loses the ability to implement the Taylor Rule at the zero lower bound. However, the promise to implement a Taylor Rule upon exit remains an effective policy instrument. We present two Taylor-Rule exit policies, each with different commitment requirements, as alternatives to a truncated Taylor Rule. A Taylor Rule with an optimally-chosen exit date and time varying inflation target delivers fully optimal policy, but requires a negative inflation target, possibly threatening the ability to commit. A Taylor Rule with only an optimally-chosen exit date delivers almost all the gains of fully optimal policy with no need to commit to the negative inflation target.

• Item Type: MPRA Paper
• Language: English
• Keywords: New-Keynesian Model, Inflation Target, Liquidity Trap
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy

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