TY  - JOUR
AU  - Eggertsson,Gauti B.
AU  - Woodford,Michael
TI  - Optimal Monetary Policy in a Liquidity Trap
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9968
PY  - 2003
Y2  - September 2003
UR  - http://www.nber.org/papers/w9968
L1  - http://www.nber.org/papers/w9968.pdf
N1  - Author contact info:
Gauti Eggertsson
Federal Reserve Bank of New York
33 Liberty Street
New York, NY, 10045
E-Mail: Gauti.Eggertsson@ny.frb.org

Michael Woodford
Department of Economics
Columbia University
420 W. 118th Street
New York, NY 10027
Tel: 212/854-1094
Fax: 212-854-8059
E-Mail: mw2230@columbia.edu
AB  - We consider the consequences for monetary policy of the zero floor for nominal interest rates. The zero bound can be a significant constraint on the ability of a central bank to combat deflation. We show, in the context of an intertemporal equilibrium model, that open-market operations, even of unconventional' types, are ineffective if they do not change expectations about the future conduct of policy; in this sense, a liquidity trap' is possible. Nonetheless, a credible commitment to the right sort of history-dependent policy can largely mitigate the distortions created by the zero bound. In our model, optimal policy involves a commitment to adjust interest rates so as to achieve a time-varying price-level target, when this is consistent with the zero bound. We also discuss ways in which other central-bank actions, while irrelevant apart from their effects on expectations, may help to make credible a central bank's commitment to its target, and consider implications for the policy options currently available for overcoming deflation in Japan.
ER  -