طراحی سیاست پولی کارآمد نزدیک به ثبات قیمت

Using dynamic programming methods, we study the design of optimal monetary policy in a simple, calibrated open-economy model and evaluate the effect of the liquidity trap generated by the zero bound on nominal interest rates.We show that the optimal policy near price stability is asymmetric. As inflation declines, policy turns expansionary sooner and more aggressively than would be optimal in the absence of the zero bound. This introduces an upward bias in the average level of inflation.We also discuss operational issues associated with the interpretation and implementation of policy at the zero bound in relation to the recent situation in Japan. J. Japan. Int. Econ., December 2000, 14(4), pp. 327–365. Board of Governors of the Federal Reserve System,Washington, D.C. 20551

Since February 12, 1999, the Bank of Japan has taken the unprecedented step of maintaining overnight interest rates “as low as possible.” This action was the latest in a series of policy easings that started in 1991 and have brought the Bank’s discount rate down to a mere 50 basis points and short-term interest rates to near zero since September 1995. In April 1999, the Policy Board of the Bank took the additional step of announcing a commitment to maintain this “zero interestrate policy” until deflationary tendencies in the Japanese economy end, ensuring that policy should be expected to remain unchanged for quite some time. As the Bank’s Deputy Governor Yamaguchi (1999a) observed recently, this policy has been successful thus far in that “the Japanese economy has, if only barely, escaped deflation.” He also noted, however, that despite these unprecedented steps, real GDP has “barely grown, an annual rate of 1%” for several years. For Japan, the 1990s appear as a long and nearly uninterrupted period of recession. 2 At the end of the 1980s, it would have been nearly impossible to envision such a predicament for this advanced industrialized nation. The Japanese economy enjoyed real growth of about 4% during that decade. Japan also managed to maintain near price stability during the 1980s. However, starting with the collapse of equity prices at the end of the 1980s, a number of structural problems have emerged during the 1990s and as a result the Japanese economy is still going through a process of adjustment.3 Although the Bank of Japan eventually adopted a policy of zero overnight nominal interest rates, the deflationary environment that persisted through much of the 1990s placed a lower bound on the short-term real rate of interest and ruled out the negative real interest rates that the Bank might have chosen to promote, had inflation been higher. Thus, the earlier success of maintaining an environment of near price stability may have contributed, at least to some degree, to the difficulties in providing sufficiently expansionary monetary conditions to ease the economy out of its slump. At least for the past 30 years, the question of whether the zero bound on nominal interest might present such a practical difficulty for the conduct of monetary policy did not appear to be an important issue. The primary concern of monetary policy in most industrialized countrieswas howto reduce inflation and achieve and maintain price stability—not how to defend against the possible pitfalls associated with deflation. The success in achieving the price stability goal and the lessons offered by the recent experience in Japan, however, have again focused attention on the zero bound. An example of this confluence of events and concerns became evident at a 1996 central bank conference sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. The topic of the conference, “Achieving Price Stability,” was meant to describe policies for reducing inflation but the issues associated with the deflationary environment in Japan also became part of the discussion. As IMF First Deputy Managing Director Fischer noted: “On Japan, I don’t doubt that Japanese monetary authorities would have liked to have cut the real interest rate, if they could have, and that the zero constraint on the nominalrate did have an impact on the speed or lack of speed with which they are coming out of the recession” (1996, p. 50). Largely in response to these developments, a number of studies have recently started to investigate the theoretical and practical relevance of the zero bound. Among these studies, Krugman (1998), Wolman (1998), and McCallum (1999) have examined the analytical underpinnings of the zero bound and the liquidity trap in different models. From a quantitative perspective, the deterioration in stabilization performance due to the zero bound has been evaluated in estimated models of the U.S. economy by Fuhrer and Madigan (1997), Orphanides and Wieland (1998), and Reifschneider andWilliams (1999). Buiter and Panigirtzoglou (1999) and Goodfriend (1999) have addressed theoretical and implementation-oriented questions regarding the possibility of circumventing the zero bound by imposing a tax on currency and reserve holdings. Clouse et al. (1999), Johnson et al. (1999) and Small and Clouse (1999) have studied the role of policy options other than traditional open market operations as well as potential legal constraints on Federal Reserve policy actions that might be contemplated to ameliorate difficulties from the presence of the bound. In this paper, we address a question that has not yet been adequately examined in this literature, namely the optimal design of monetary policy in the presence of the zero bound on nominal interest rates. Although the zero bound introduces a structural nonlinearity in any macroeconomic model, so far quantitative analyses have focused on evaluating its effect under simple Taylor-type policy rules for setting the nominal interest rate with alternative inflation or price level targets.4 Here, we use numerical dynamic programming methods to compute the optimal policy, which may be nonlinear, and contrast the solution to that obtained when the zero bound is ignored. For this purpose, we use a simple calibrated open-economy model, which incorporates both an interest and an exchange rate channel of monetary policy transmission. At first, we analyze the optimal policy in this model without the zero bound. Once we introduce the zero bound into the model, we also allow the quantity of base money to have some direct effect on aggregate demand and inflation, even when the nominal interest rate is constrained at zero. The particular channel for such quantity effects that we focus on is the portfolio balance effect. This effect implies that the exchange rate will respond to changes in the relative domestic and foreign money supplies even when interest rates remain constant at zero.We show that in the presence of such quantity effects it is important to discuss the policy stance in terms of base money, whenever nominal interest rates are constrained at zero. Of course, empirical estimates of such effects based on data from periods where interest rates were unconstrained are very imprecise.We account for parameter uncertainty regarding such quantity effects as well as for uncertainty due toprice and demand shocks explicitly in our analysis. Our findings indicate that uncertainty about the continued effectiveness of policy has important consequences for understanding the behavior of the economy near price stability and the costs associated with the zero bound.We find that the optimal policy near price stability is asymmetric; that is, as inflation declines policy turns expansionary sooner and more aggressively than would be optimal in the absence of the zero bound.We also show that the same asymmetry arises when the direct quantity effects are known with certainty but large variations in the quantity of money cannot be executed costlessly. As a consequence of the optimal policy, the average level of inflation is biased upward. This bias arises because policymakers are faced with a trade-off between the level of inflation and the economic stabilization performance when the economy is operating near the zero bound. The paper is organized in six sections. Following the Introduction, in Section 2, we offer a brief discussion of the zero bound issue in theory and in practice, drawing from the recent Japanese experience and the U.S. experience in the 1930s. In Section 3 we introduce our simple model abstracting both from the zero bound and from the existence of direct quantity effects. In Section 4 we then examine optimal policies incorporating the constraint as well as small uncertain quantity effects. In Section 5 we relate our analysis to some operational issues regarding the communication and implementation of policy at the zero bound given the recent experience in Japan. Section 6 concludes.

While the zero bound on nominal interest rates shuts off the primary channel of monetary policy transmission, it need not imply that monetary policy becomes completely ineffective. Rather, other channels, which allow for direct quantity effects and may normally not be very relevant due to their small and uncertain magnitude, become important for stabilization policy. These additional channels range from the influence of monetary expansions on the level of the exchange rate, term spreads, outside risk spreads on financing instruments, asset revaluation, and possible Pigouvian real-wealth effects. In this paper, we have investigated optimal monetary policy near price stability allowing for the possibility of small pure quantity effects and explicitly incorporating uncertainty about these effects into the analysis. Since these channels are much weaker than the direct interest rate channel, substantially greater changes in the quantity of money, as measured by the Marshallian K, for instance, are required to bring about a desired increase on aggregate demand and inflation when the overnight interest rate is bound at zero. If the policy multipliers and the monetary transmission mechanism from these were well understood, the zero bound would not present a significant concern for stabilization policy. Policy would need to be much more activist in terms of the monetary base but could still effectively stabilize the economy. However, once uncertainty regarding these effects is taken into account the costs of successful stabilization policy near price stability increase substantially. Although the liquidity trap does not render monetary policy completely ineffective, its presence remains costly. The optimal policy in the presence of the zero bound exhibits two complementary elements that ameliorate the potential for deflationary crises. First, to mitigate the costs induced by the zero bound, it is optimal to respond asymmetrically to inflation. As inflation declines, policy turns expansionary sooner and more aggressively than would be optimal in the absence of the zero bound. Second, the optimal policy introduces an upward bias in inflation and distorts the stochastic distributions of economic outcomes. Thus, if a policymaker would have opted for zero inflation as the long-run policy target, the optimal stabilization policy near price stability will lead to an average level of inflation exceeding zero. In essence, the presence of the zero bound generates a trade-off between economic stabilization and average inflation. While our work confirms that, on an analytical level, the quantity aspects of the transmission mechanism can play an important role in the presence of the zero bound, we also discuss how monetary policy may continue to use interest rate instruments on an operational level, if that is deemed more appropriate by the central bank. Because the stance of policy cannot be effectively communicated in terms of the overnight rate at the zero bound, the policy directive would eventually need to be suitably adjusted to longer-than-overnight short-term interest rates.