Discussion Paper Details

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Title: (Un)conventional Policy and the Effective Lower Bound

Author(s): Fiorella De Fiore and Oreste Tristani

Publication Date: March 2019

Keyword(s): asymmetric information, Optimal monetary policy, unconventional policies and zero-lower bound

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We study the optimal combination of interest rate policy and unconventional monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that credit policy can be a powerful substitute for interest rate policy. In the face of shocks that negatively affect bank monitoring efficiency, unconventional measures insulate the real economy from further deterioration in financial conditions and it may be optimal for the central bank not to cut rates to zero. Thus, credit policy lowers the likelihood of hitting the zero bound constraint. Reductions in the policy rates without non-standard measures are sub-optimal as they force savers to inefficiently change their intertemporal consumption patterns.

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Bibliographic Reference

De Fiore, F and Tristani, O. 2019. '(Un)conventional Policy and the Effective Lower Bound'. London, Centre for Economic Policy Research.