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.

Taxonomy

Banks and banking , Central banks , Deflation , Economic policy , Financial institutions and markets , Foreign exchange , Monetary policy

More publications in this series: Working Papers

More publications by: Olivier Jeanne ; Lars E O Svensson