Monetary policy interactions : the policy rate, asset purchases, and optimal policy with an interest rate peg

Isabel Gödl-Hanisch, Ronald Mau, Jonathan Rawls

We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. The "divine coincidence" holds with the nominal short-term rate and central bank balance sheet available as policy tools. Credit spread-targeting balance sheet policy provides a determinate equilibrium with a fixed policy rate. This policy induces similar welfare losses relative to dual-instrument policy as inflation-targeting interest rate policy with a fixed balance sheet.

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Year of publication:	April 2023
Authors:	Gödl-Hanisch, Isabel ; Mau, Ronald ; Rawls, Jonathan
Publisher:	Munich, Germany : CESifo
Subject:	unconventional monetary policy \| optimal monetary policy \| New Keynesian model \| policy rate lower bound \| interest rate peg \| Geldpolitik \| Monetary policy \| Neoklassische Synthese \| Neoclassical synthesis \| Theorie \| Theory \| Zins \| Interest rate \| Zinspolitik \| Interest rate policy \| Regelbindung versus Diskretion \| Rules versus discretion \| Wirkungsanalyse \| Impact assessment \| Niedrigzinspolitik \| Low-interest-rate policy