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Ji Zhang
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Publisher: Journals Gateway
The Review of Economics and Statistics 1–45.
Published: 09 July 2021
Abstract
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This paper develops a New Keynesian model featuring financial intermediation, short- and long-term bonds, credit shocks, and scope for unconventional monetary policy. The log-linearized model reduces to four equations – Phillips and IS curves as well as policy rules for the short-term interest rate and the central bank's long-bond portfolio (QE). Credit shocks and QE appear in both the IS and Phillips curves. In equilibrium, optimal monetary policy entails adjusting the short-term interest rate to offset natural rate shocks, but using QE to offset credit market disruptions. Use of QE significantly mitigates the costs of a binding zero lower bound.