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Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank
Author:
Mr. Olivier D Jeanne
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Mr. Lars E. O. Svensson null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2004: Issue 162
Language:
English
Publication Date:
01 Sep 2004
DOI:
https://doi.org/10.5089/9781451857900.001
ISBN:
9781451857900
ISSN:
1018-5941
Pages:
44
Keywords:
WP; mover accent; Zero lower bound for interest rates; deflation; balance-sheet concern; price level; optimization problem; central-bank capital; budget constraint; output gap; Exchange rates; Liquidity; Inflation; Currencies; Capital adequacy requirements
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson's Foolproof Way to escape from a liquidity trap.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund