Dynamic Debt Deleveraging and Optimal Monetary Policy
- (pp. 310-50)
Abstract
This paper proposes a postcrisis New Keynesian model that incorporates agent heterogeneity in borrowing and lending with a minimum set of assumptions. Unlike the standard framework, this model makes the natural rate of interest endogenous and dependent on macroeconomic policy. The main application is to study optimal monetary policy at the zero lower bound (ZLB). Such policy succeeds in raising the natural rate of interest by creating an environment that speeds up deleveraging and thus endogenously shortens the crisis and the duration of binding ZLB. Inflation should be front-loaded and should overshoot its long-term target during the ZLB episode.Citation
Benigno, Pierpaolo, Gauti B. Eggertsson, and Federica Romei. 2020. "Dynamic Debt Deleveraging and Optimal Monetary Policy." American Economic Journal: Macroeconomics, 12 (2): 310-50. DOI: 10.1257/mac.20160124Additional Materials
JEL Classification
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
- E31 Price Level; Inflation; Deflation
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
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