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

Author/Editor:

Olivier D Jeanne ; Lars E. O. Svensson

Publication Date:

September 1, 2004

Electronic Access:

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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.

Series:

Working Paper No. 04/162

Subject:

English

Publication Date:

September 1, 2004

ISBN/ISSN:

9781451857900/1018-5941

Stock No:

WPIEA1622004

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

44

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