Dynamic Debt Deleveraging and Optimal Monetary Policy
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.
We are grateful to conference participants at the Federal Reserve Bank of Cleveland, the Midwest Macro Meetings, the EEA-ESEM 2014 conference, and to the internal seminar partecipants at Wirtschaftsuniversität Wien. We also thank Nicolas Cuche-Curti, Alexander Mechanick and Sanjay Singh for comments and Alyson Price for editorial assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Pierpaolo Benigno & Gauti B. Eggertsson & Federica Romei, 2020. "Dynamic Debt Deleveraging and Optimal Monetary Policy," American Economic Journal: Macroeconomics, vol 12(2), pages 310-350. citation courtesy of