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Macroprudential Interventions in Liquidity Traps

Research output: Working paper

Published
Publication date02/2019
Place of PublicationLancaster
PublisherLancaster University, Department of Economics
Original languageEnglish

Publication series

NameEconomics Working Papers Series

Abstract

We characterize the joint optimal implementation of macroprudential and monetary policies in a New Keynesian model where endogenous supply-side financial frictions generate inflationary credit spreads. State-contingent macroprudential interventions help to stabilize volatile spreads, and substantially alter the transmission of optimal monetary policy under both discretion and commitment. In 'normal times', macroprudential policies replicate the first-best allocation. In liquidity traps, financial interventions remove the zero lower bound restriction on the nominal policy rate, thus minimizing output costs following both deflationary (inflationary) demand (financial) shocks. Discretionary and commitment policies with macroprudential taxes deliver equivalent welfare gains.