Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank
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Summary:
An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson's Foolproof Way to escape from a liquidity trap.
Series:
Working Paper No. 2004/162
Subject:
Asset and liability management Banking Capital adequacy requirements Currencies Exchange rates Financial regulation and supervision Foreign exchange Inflation Liquidity Money Prices
English
Publication Date:
September 1, 2004
ISBN/ISSN:
9781451857900/1018-5941
Stock No:
WPIEA1622004
Pages:
44
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