Macroeconomics Seminar - Anna Lipinska (Federal Reserve Board)
Room 605, Level 6, FBE Building, 111 Barry Street, CarltonMap
Title: A Welfare-Based Analysis of International Monetary Policy Spillovers at the Zero Lower Bound
Abstract: We study the welfare eﬀects of international monetary policy spillovers at the zero lower bound, focusing on the eﬀects of forward guidance in a large economy (“foreign”) on its smaller trading partner (“home”). We ﬁnd that when foreign forward guidance has an overall prosper-thy-neighbor eﬀect on the home economy as long as it increases foreign welfare. Foreign forward guidance—when stabilizing the foreign economy—has a large direct positive eﬀect on home welfare that dominates overall home welfare eﬀect. However, foreign forward guidance may worsen the trade-oﬀ between the stabilization objectives of home monetary policy. This occurs when foreign forward guidance leads to higher home inﬂation and a more negative output gap on account of the expenditure switching eﬀect more than oﬀsetting the aggregate demand eﬀect. In this case, the optimal home monetary policy response to foreign guidance is to be more accommodative.