{"title":"Monetary policy interactions: The policy rate, asset purchases, and optimal policy with an interest rate peg","authors":"Isabel Gödl-Hanisch , Ronald Mau , Jonathan Rawls","doi":"10.1016/j.euroecorev.2025.104985","DOIUrl":null,"url":null,"abstract":"<div><div>We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. These channels arise due to a liquidity premium to long-term debt present in our model. The “divine coincidence” holds with the nominal short rate and central bank balance sheet available as policy tools—dual-instrument policy. Targeting the liquidity premium using balance sheet policy provides a determinate equilibrium with a fixed policy rate, as does inflation-targeting balance sheet policy. While the liquidity premium in our model depends on unobservable components, the slope of the yield curve serves as a proxy for the liquidity premium when thinking about implementable monetary policy strategies that respond to observable variables alone. We quantify the welfare costs to various monetary policy strategies relative to the analytically derived optimal dual-instrument policy.</div></div>","PeriodicalId":48389,"journal":{"name":"European Economic Review","volume":"174 ","pages":"Article 104985"},"PeriodicalIF":2.8000,"publicationDate":"2025-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"European Economic Review","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0014292125000352","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"ECONOMICS","Score":null,"Total":0}
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Abstract
We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. These channels arise due to a liquidity premium to long-term debt present in our model. The “divine coincidence” holds with the nominal short rate and central bank balance sheet available as policy tools—dual-instrument policy. Targeting the liquidity premium using balance sheet policy provides a determinate equilibrium with a fixed policy rate, as does inflation-targeting balance sheet policy. While the liquidity premium in our model depends on unobservable components, the slope of the yield curve serves as a proxy for the liquidity premium when thinking about implementable monetary policy strategies that respond to observable variables alone. We quantify the welfare costs to various monetary policy strategies relative to the analytically derived optimal dual-instrument policy.
期刊介绍：
The European Economic Review (EER) started publishing in 1969 as the first research journal specifically aiming to contribute to the development and application of economics as a science in Europe. As a broad-based professional and international journal, the EER welcomes submissions of applied and theoretical research papers in all fields of economics. The aim of the EER is to contribute to the development of the science of economics and its applications, as well as to improve communication between academic researchers, teachers and policy makers across the European continent and beyond.
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