Monetary policy at the ZLB in the current crisis

Transcription

1 Monetary policy at the ZLB in the current crisis Lars E.O. Svensson May Lars E.O. Svensson Monetary policy at ZLB

2 Monetary policy so far Policy rates have been brought down 6,0 5,0 4,0 3,0 Sweden Sweden, forward rate 11 May Euro area Euro area, forward rate 11 May USA USA, forward rate 11 May UK UK, forward rate 12 May 6,0 5,0 4,0 3,0 2,0 2,0 1,0 1,0 0,0 jan 08 jul 08 jan 09 jul 09 jan 10 jul 10 jan 11 jul 11 0,0 2 Lars E.O. Svensson Monetary policy at ZLB

3 Financial stability so far Spreads have come down from last fall Sweden Euro area USA United Kingdom jan 08 apr 08 jul 08 okt 08 jan 09 apr 09 jul 09 Basis spreads 3 months 3 Lars E.O. Svensson Monetary policy at ZLB

4 Monetary policy so far in Sweden Repo-rate path lowered to 50 b.p. through ,50 Repo rate 5,50 5,00 5,00 4,50 Old repo rate path 4,50 4,00 3,50 3,00 New repo rate path Day before Day after 4,00 3,50 3,00 2,50 2,50 2,00 2,00 1,50 1,50 1,00 1,00 0,50 0,50 0,00 0, Lars E.O. Svensson Monetary policy at ZLB

5 Monetary policy in a binding ZLB (ELB) Simple New Keynesian model Output gap x t = x t+1jt σ(i t + δ t π t+1jt r t ) T 1 = x t+tjt σ i t+τjt T 1 σ T 1 δ t+τjt + σ p t+tjt p t + σ r t+τjt x t output gap, i t policy rate, δ t spread market-policy rate, π t p t p t 1 inflation, p t price level, r t neutral real rate 5 Lars E.O. Svensson Monetary policy at ZLB

6 Monetary policy in a binding ZLB (ELB) Simple New Keynesian model x t = x t+tjt T 1 σ i t+τjt T 1 σ T 1 δ t+τjt + σ p t+tjt p t + σ r t+τjt x t output gap, i t policy rate, δ t spread market-policy rate, π t p t p t 1, r t neutral real rate Announce low policy-rate path further into the future, T 1 i t+τjt # Keep spreads low, T 1 δ t+τjt # Keep up inflation expectations up, p t+t,t " Keep neutral rate up, T 1 r t+τjt " (fiscal policy) 6 Lars E.O. Svensson Monetary policy at ZLB

7 Zero policy rate further into the future Fed, Sweden, Canada Repo-rate path good thing Credibility? 7 Lars E.O. Svensson Monetary policy at ZLB

8 Zero policy rate further into the future Repo rate and market expectations, February 11, ,50 Repo rate 5,50 5,00 5,00 4,50 Old repo rate path 4,50 4,00 3,50 3,00 New repo rate path Day before Day after 4,00 3,50 3,00 2,50 2,50 2,00 2,00 1,50 1,50 1,00 1,00 0,50 0,50 0,00 0, Lars E.O. Svensson Monetary policy at ZLB

9 Zero policy rate further into the future Repo rate and market expectations, April 21, ,50 Repo rate 5,50 5,00 5,00 4,50 Old repo rate path 4,50 4,00 3,50 3,00 New repo rate path Day before Day after 4,00 3,50 3,00 2,50 2,50 2,00 2,00 1,50 1,50 1,00 1,00 0,50 0,50 0,00 0, Lars E.O. Svensson Monetary policy at ZLB

10 Zero policy rate further into the future Fed, Sweden, Canada Repo-rate path good thing Credibility? How make credible? Buy government bonds? Better? Lend at policy rate (fixed) at longer maturity 10 Lars E.O. Svensson Monetary policy at ZLB

11 Keep spreads down Credit easing Financial-stability policy 11 Lars E.O. Svensson Monetary policy at ZLB

12 Keep up inflation expectations Promise high inflation in the future (low policy rate in the future) Credible? (Krugman 98) Credible positive inflation target good But what if we need inflation above target? Price-level target (average-inflation target) Quantitative easing, expand monetary base/money supply (works only if believed to be permanent, otherwise probably useless) 12 Lars E.O. Svensson Monetary policy at ZLB

13 Small open economy: The exchange rate Easy monetary policy is a package: Lower policy rate, higher inflation, higher inflation expectations, lower real rate, higher output gap, weaker currency Announce zero policy rate for longer Induce lower policy-rate expectations by lending longer at policy rate Support easy monetary policy with (threat of) FX intervention to depreciate currency/avoid appreciation (Switzerland) Foolproof Way, Mark II 13 Lars E.O. Svensson Monetary policy at ZLB

14 Small open economy: The exchange rate Foolproof Way, Mark I (Svensson 2000): 1 Price-level target (path) (above current price level) 2 Currency depreciation and peg 3 When price-level target achieved, return to floating exchange rate and price-level/inflation target 14 Lars E.O. Svensson Monetary policy at ZLB

15 Small open economy: The exchange rate Weak currency, not competitive devaluation, not beggar-thy-neighbor Just integrated part of normal easy monetary policy through unconventional means Maintain activity, maintain import Currency depreciation is terms-of-trade improvement for trading partners Easy monetary policy in all countries good Maintain activity, import, world trade Small open economy: Exchange rate important for own economy, little or no effect on rest of world Large economy: Exchange rate less important for own economy, large effect on rest of world 15 Lars E.O. Svensson Monetary policy at ZLB