Discussion Paper Details

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Title: Managing Monetary Policy Normalization

Author(s): Pierpaolo Benigno and Gianluca Benigno

Publication Date: May 2022


Programme Area(s): Monetary Economics and Fluctuations

Abstract: We propose a new framework for monetary policy analysis to study monetary policy normalization when exiting a liquidity trap. The optimal combination of reserves and interest rate policy requires an increase in liquidity (reserves) a few quarters after the policy rate is set at the effective lower bound. Removal of accommodation requires that quantitative tightening starts before the liftoff of the policy rate. Moreover, the withdrawal of liquidity takes place at a very slow pace relative to the normalization of the policy rate.

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Bibliographic Reference

Benigno, P and Benigno, G. 2022. 'Managing Monetary Policy Normalization'. London, Centre for Economic Policy Research.