Monetary Policy and Financial Markets at the Effective Lower Bound

I discuss what determines the effective lower bound (ELB) for the policy rate and argue that the ELB is not hard, but rather soft, and that it is probably slightly negative. I argue that, at the ELB, current output can be increased by (i) monetary policy that extends the period of credibly low polic...

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Bibliographic Details
Published inJournal of money, credit and banking Vol. 42; no. s1; pp. 229 - 242
Main Author SVENSSON, LARS E.O.
Format Journal Article
LanguageEnglish
Published Malden, USA Blackwell Publishing Inc 01.09.2010
Wiley Periodicals Incorporated
Subjects
Central banks
DISCUSSIONS
E43
E52
E58
Economic expectations
Environmental policy
Financial markets
Government expenditures
Inflation rates
Interest rates
Monetary policy
Nominal interest rates
Repurchase agreement
zero lower bound
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Summary:I discuss what determines the effective lower bound (ELB) for the policy rate and argue that the ELB is not hard, but rather soft, and that it is probably slightly negative. I argue that, at the ELB, current output can be increased by (i) monetary policy that extends the period of credibly low policy rates and generates inflation expectations, (ii) financial-stability policy— which is distinct from monetary policy— that reduces the spreads between market interest rates and the policy rate, and (iii) fiscal policy that increases the neutral real rate by reducing expected growth of government expenditure and increases potential output by increasing current government expenditure.
Bibliography:ArticleID:JMCB337
istex:FF35FE2175A6E42D29BDC040B9E45DCB265E7D1A
ark:/67375/WNG-VNKHHTLV-8
This a revised and updated version of a speech held on June 4, 2009, at the conference “Financial Markets and Monetary Policy,” Federal Reserve Board. The views expressed here are my own and are not necessarily shared by other members of the Riksbank's Executive Board or staff. I thank Meredith Beechey for comments. Carl‐Andreas Claussen, Megan Owens, and Per Åsberg‐Sommar have contributed to this speech.
ISSN:0022-2879
1538-4616
DOI:10.1111/j.1538-4616.2010.00337.x