Credible Commitment to Optimal Escape from a Liquidity Trap

The Role of the Balance Sheet of an Independent Central Bank

• Author(s): Mr.Olivier Jeanne, Mr.Lars E. O. Svensson,
• Publisher: International Monetary Fund
• Pages: 44
• ISBN_10: 145185790X
  ISBN_13: 9781451857900
  
• Language: en
• Categories: Business & Economics / Banks & Banking , Business & Economics / Foreign Exchange , Business & Economics / Finance / General ,

Description:... 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.