Working Paper: CEPR ID: DP3895
Authors: Günter Coenen; Volker Wieland
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.
Keywords: exchange rates; liquidity trap; monetary policy rules; monetary transmission; nominal rigidities; rational expectations; zero interest rate bound
JEL Codes: E31; E52; E58; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| zero-interest rate bound (E43) | effectiveness of monetary policy (E52) |
| zero-interest rate bound (E43) | output (C67) |
| zero-interest rate bound (E43) | inflation (E31) |
| liquidity expansions (E41) | adverse effects of the zero bound (E43) |
| monetary base (E50) | exchange rate (F31) |
| exchange rate (F31) | output (C67) |
| exchange rate (F31) | inflation (E31) |