American Economic Review Vol. 97 No. 1 2007

Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank

Olivier Jeanne^1,2,3; LarsE. O. Svensson^1,3,2

¹ National Bureau of Economic Research · ² Johannes Gutenberg University Mainz · ³ Princeton University

Abstract

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.

DOI

10.1257/000282807780323361

Volume

97

Issue

1

Pages

474-490

Language

en

Sources

openalex crossref

Cite

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