Optimal irreversible monetary policy

Kohei Hasui, Teruyoshi Kobayashi and Tomohiro Sugo

No 2109, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: Real-world central banks have a strong aversion to policy reversals. Nevertheless, theoretical models of monetary policy within the dynamic general equilibrium framework normally ignore the irreversibility of interest rate control. In this paper, we develop a formal model that incorporates a central bank's discretionary optimization problem with an aversion to policy reversals. We show that, even under a discretionary regime, the optimal timing of liftoff from the zero lower bound is characterized by its history dependence, which arises from the option value to waiting, and there exists an optimal degree of policy irreversibility at which the social loss is minimized.

Pages: 40 pages
Date: 2021-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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