This a revised and updated version of a speech held on June 4, 2009, at the conference “Financial Markets and Monetary Policy,” Federal Reserve Board. The views expressed here are my own and are not necessarily shared by other members of the Riksbank's Executive Board or staff. I thank Meredith Beechey for comments. Carl-Andreas Claussen, Megan Owens, and Per Åsberg-Sommar have contributed to this speech.
Monetary Policy and Financial Markets at the Effective Lower Bound
Version of Record online: 18 AUG 2010
© 2010 The Ohio State University
Journal of Money, Credit and Banking
Volume 42, Issue Supplement s1, pages 229–242, September 2010
How to Cite
SVENSSON, L. E.O. (2010), Monetary Policy and Financial Markets at the Effective Lower Bound. Journal of Money, Credit and Banking, 42: 229–242. doi: 10.1111/j.1538-4616.2010.00337.x
- Issue online: 18 AUG 2010
- Version of Record online: 18 AUG 2010
- Received May 3, 2010; and accepted in revised form May 4, 2010.
- zero lower bound
I discuss what determines the effective lower bound (ELB) for the policy rate and argue that the ELB is not hard, but rather soft, and that it is probably slightly negative. I argue that, at the ELB, current output can be increased by (i) monetary policy that extends the period of credibly low policy rates and generates inflation expectations, (ii) financial-stability policy—which is distinct from monetary policy—that reduces the spreads between market interest rates and the policy rate, and (iii) fiscal policy that increases the neutral real rate by reducing expected growth of government expenditure and increases potential output by increasing current government expenditure.