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Discussion Paper Details

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Title: The Zero-Interest Rate Bound and the Role of the Exchange Rate for Monetary Policy in Japan

Author(s): G�nter Coenen and Volker Wieland

Publication Date: May 2003

Keyword(s): exchange rates, liquidity trap, monetary policy rules, monetary transmission, nominal rigidities, rational expectations and zero interest rate bound

Programme Area(s): International Macroeconomics

Abstract: In this Paper we study the role of the exchange rate in conducting monetary policy in an economy with near-zero nominal interest rates as experienced in Japan since the mid-1990s. Our analysis is based on an estimated model of Japan, the United States and the euro area with rational expectations and nominal rigidities. First, we provide a quantitative analysis of the impact of the zero bound on the effectiveness of interest rate policy in Japan in terms of stabilizing output and inflation. Then we evaluate three concrete proposals that focus on depreciation of the currency as a way to ameliorate the effect of the zero bound and evade a potential liquidity trap. Finally, we investigate the international consequences of these proposals.

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Bibliographic Reference

Coenen, G and Wieland, V. 2003. 'The Zero-Interest Rate Bound and the Role of the Exchange Rate for Monetary Policy in Japan'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3895