IMF Working Papers

Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank

By Olivier D Jeanne, Lars E. O. Svensson

September 1, 2004

Download PDF

Preview Citation

Format: Chicago

Olivier D Jeanne, and Lars E. O. Svensson Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank, (USA: International Monetary Fund, 2004) accessed December 22, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Asset and liability management, Banking, Capital adequacy requirements, Currencies, Exchange rates, Financial regulation and supervision, Foreign exchange, Inflation, Liquidity, Money, Prices

Keywords: Balance-sheet concern, Budget constraint, Capital adequacy requirements, Central-bank capital, Currencies, Deflation, Exchange rates, Inflation, Liquidity, Mover accent, Optimization problem, Output gap, Price level, WP, Zero lower bound for interest rates

Publication Details

  • Pages:

    44

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2004/162

  • Stock No:

    WPIEA1622004

  • ISBN:

    9781451857900

  • ISSN:

    1018-5941

You May Also Be Interested In...

How Has Dollarization Served Timor-Leste So Far?

December 20, 2024

Ukraine: Sixth Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Modification of a Performance Criterion, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Ukraine

December 20, 2024

Islamic Republic of Mauritania: Selected Issues

December 20, 2024

Islamic Republic of Mauritania: Staff Report for the 2024 Article IV Consultation, Third Review Under the Arrangements Under the Extended Credit Facility and Extended Fund Facility, Request for Modification of Quantitative Performance Criteria, and Second Review Under the Resilience and Sustainability Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Mauritania

December 20, 2024