Working Paper: NBER ID: w20556
Authors: Pierpaolo Benigno; Gauti B. Eggertsson; Federica Romei
Abstract: This paper studies optimal monetary policy under dynamic debt deleveraging once the zero bound is binding. Unlike the existing literature, the natural rate of interest is endogenous and depends on macroeconomic policy. Optimal monetary policy successfully raises the natural rate of interest by creating an environment that speeds up deleveraging, thus endogenously shortening the duration of the crisis and a binding zero bound. Inflation should be front loaded. Fiscal-policy multipliers can be even higher than in existing models, but depend on the way in which public spending is financed.
Keywords: Monetary Policy; Debt Deleveraging; Natural Rate of Interest; Zero Lower Bound
JEL Codes: E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal monetary policy (E63) | Natural rate of interest (E43) |
| Natural rate of interest (E43) | Speed of deleveraging (F65) |
| Optimal monetary policy (E63) | Speed of deleveraging (F65) |
| Speed of deleveraging (F65) | Natural rate of interest (E43) |
| Monetary policy (E52) | Duration of crisis (H12) |
| Natural rate of interest (E43) | Duration of crisis (H12) |
| Optimal monetary policy (E63) | Inflation outcomes (E31) |
| Aggressive fiscal policy (E62) | Fiscal multipliers (E62) |