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Robust Monetary Policy Under Uncertainty About the Lower Bound

  • Peter Tillmann EMAIL logo
Published/Copyright: July 29, 2020

Abstract

Central banks face uncertainty about the true location of the effective lower bound (ELB) on nominal interest rates. We model optimal discretionary monetary policy during a liquidity trap when the central bank designs policy that is robust with respect to the location of the ELB. If the central bank fears the worst-case location of the ELB, monetary conditions will be more expansionary in the period before the liquidity trap.

JEL Classification: E31; E32; E58

Corresponding author: Peter Tillmann, Department of Economics, Justus-Liebig-University Gießen, University of Giessen, Licher Str. 66, D-35394, Gießen, Germany, E-mail:

Funding source: DAAD PPP "Uncertainty and Monetary Policy"

Acknowledgement

I am grateful to an anonymous referee for very helpful comments and to David Finck for fruitful discussions.

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Received: 2019-04-05
Accepted: 2020-05-24
Published Online: 2020-07-29

© 2020 Walter de Gruyter GmbH, Berlin/Boston

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