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Fiorella de Fiore, ECB Print
Tuesday, 20 March 2012, 14:00 - 15:15

Fiorella de Fiore, ECB

www.ecb.int

Credit Risk and the Zero-Interest Rate Bound (joint with O. Tristani)

Abstract: We study the implications for monetary policy of the zero-interest rate bound (ZLB) when agency costs generate a spread between deposit and lending rates. We show that, when policy follows a Taylor rule, the deflationary effects of a negative preference shock are amplified relative to the case with frictionless financial markets and the likelihood of hitting the zero bound is higher. Under optimal policy, adverse financial shocks can also lead the nominal rate to the ZLB, because they cause an inefficient fall in households' consumption. The policy easing occurs in spite of the absence of deflationary pressures.

 

Location: R42.2.113
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