Working Paper: NBER ID: w10679
Authors: Olivier Jeanne; Lars E.O. Svensson
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E52; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central Bank's management of its capital (E58) | Commitment mechanism (C78) |
| Commitment mechanism (C78) | Future inflation expectations (E31) |
| Central Bank's management of its capital (E58) | Future inflation expectations (E31) |
| Central Bank's management of its capital (E58) | Avoid negative capital situations (G33) |
| Avoid negative capital situations (G33) | Central Bank's independence (E58) |
| Central Bank's management of its capital (E58) | Monetary policy effectiveness (E52) |
| Central Bank's actions (E58) | Economy's ability to recover from a liquidity trap (E12) |