I show that debt maturity considerations affect the optimal conduct of monetary and fiscal policy in presence lower bound episodes. consider a New Keynesian model where on nominal interest rates binds occasionally. study under discretion, characterizing strategic use government as tool to expectations real inflation. During episodes, long-term bonds makes it temporarily consolidate debt. In add...

Abstract This paper studies the optimal design of a macro-prudential instrument, loan-to-value (LTV) limit, and its implications for monetary policy in model with nominal rigidities financial frictions. The analysis accounts both an effective lower bound on interest rate upper ability LTV limits to stimulate credit demand. welfare-based loss function features role enhance risk-sharing. Optimal ...

Confronting a prolonged period of slow growth, Japan has recently faced a difficult policy environment, with large budget deficits apparently precluding the use of traditional fiscal stimulus, and zero short-term interest rates apparently precluding the use of traditional monetary stimulus. This paper reconsiders each of these conclusions. In earlier work (Auerbach and Obstfeld 2004a,b), we out...

A goal of this paper is to make sense of the seemingly puzzling behavior of interest rates and inflation and the role of central banks in that behavior during and after the Great Recession, particularly in the United States. To this end, we construct a model in which government debt plays a key role in exchange, and can bear a liquidity premium. If asset market constraints bind, then there need...

The result of Benhabib, Schmitt-Grohé, and Uribe (2001) is powerful because it relies only on three rather natural conditions: the Fisher equation, the convex Taylor rule, and the lower bound of the nominal interest rate. Their result is striking because the paper reveals the peril of the active Taylor rule, which has been shown to implement the target in a stable manner under various condition...

Once the zero bound on nominal interest rates is taken into account, Taylor-type interest-rate feedback rules give rise to unintended self-fulfilling decelerating inflation paths and aggregate fluctuations driven by arbitrary revisions in expectations. These undesirable equilibria exhibit the essential features of liquidity traps, as monetary policy is ineffective in bringing about the governme...

We provide a fully articulated theoretical foundation for the view that a central bank’s (CB) balance sheet concerns may hinder monetary policy “activism” needed to achieve macroeconomic stability. When the Taylor rule is constrained by the zero lower bound on the nominal interest rate, there emerges a second steady state equilibrium which has the properties of a liquidity trap. CB’s balance sh...

The failure of the Japanese economy to respond to aggressive monetary easing in the form of a zero bid rate on the Bank of Japan's overnight financing facility has reminded some economists of Hicks's IS-LM rendition of Keynes's "liquidity trap". Those who use Hicks's famous diagram as the point of reference for evaluating monetary policy will recall that at some low rate of interest the horizon...