Exchange-Rate Policy and the Zero Bound on Nominal Interest Rates

摘要

Due to the recent experience in Japan the threat of deflation and a liquidity trap has taken center stage in the debate on the proper formulation of monetary policy. Deflationary episodes present a particular problem for monetary policy because the effectiveness of its main instrument, the short-term nominal interest rate, may be limited by the zero lower bound. With interest rates neat zero, the central bank will not be able to offset recessionary shocks by lowering nominal and thereby real interestrates Furthermore, deflationary shocks may raise real interest rates and worsen such a recession.