Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25438
Authors: 
Wieland, Volker
Coenen, Günter
Year of Publication: 
2004
Series/Report no.: 
CFS Working Paper 2004/14
Abstract: 
In this paper, we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylized micro-founded two-country model to check our qualitative findings. We find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target path is not directly observable.
Subjects: 
monetary policy rules
zero-interest-rate bound
liquidity trap
rational expectations
nominal rigidities
exchange rates
JEL: 
E31
E52
E58
E61
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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