Animal spirits, risk premia and monetary policy at the zero lower bound

Christian R. Proaño*, Benjamin Lojak

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)

Abstract

In this paper we investigate the risk-related effects of monetary policy in normal times, as well as in periods where the zero lower bound (ZLB) binds, in a stylized macroeconomic model with boundedly rational beliefs. In our model, financial market participants use heuristics to assess the risk premium over the policy rate in accordance to an “implicit Taylor rule” that measures the stance of conventional monetary policy and which serves as an informative instrument during times when the funds rate is constrained by the ZLB. In such a case, conventional monetary policy is exhausted so that the central bank is forced to use unconventional types of policy. We propose alternative monetary policy measures to help the economy out of the liquidity trap which take into account this assumed form of bounded rationality.

Original languageEnglish
Pages (from-to)221-233
Number of pages13
JournalJournal of Economic Behavior and Organization
Volume171
DOIs
Publication statusPublished - Mar 2020

Fingerprint

Dive into the research topics of 'Animal spirits, risk premia and monetary policy at the zero lower bound'. Together they form a unique fingerprint.

Cite this