March 2010 issue contents
The Zero Lower Bound and Monetary Policy in a Global Economy: A Simple Analytical Investigation

by Ippei Fujiwaraa, Nao Sudob, and Yuki Teranishib


How should monetary policy cooperation be designed when more than one country is simultaneously facing zero lower bounds on nominal interest rates? To answer this question, we examine monetary policy cooperation with both optimal discretion and commitment policies in a two-country model. We reach the following conclusions. Under discretion, monetary policy cooperation is characterized by the intertemporal elasticity of substitution (IES), a key parameter measuring international spillovers, and no history dependency. On the other hand, under commitment, monetary policy features history dependence with international spillover effects.

JEL Codes: E52, F33, F41.

Full article (PDF, 32 pages 416 kb)

Discussion by Paolo Pesenti

a Financial Markets Department, Bank of Japan
b Institute for Monetary and Economic Studies, Bank of Japan