Role of money at the lower bound

Roberto Billi, Ulf Söderström and I just reviewed the proofs for our forthcoming JMCB paper, "The role of money in monetary policy at the lower bound."  In the paper, we reconsider the merits of strict money growth targeting (MGT) relative to conventional inflation targeting (IT) and to price level targeting (PLT). We evaluate these policies in terms of social welfare through the lens of a new Keynesian model and accounting for a zero lower bound (ZLB) constraint on the nominal interest rate. Although MGT makes monetary policy vulnerable to money demand shocks, MGT contributes to achieving price level stationarity and significantly reduces the incidence and severity of the ZLB relative to both IT and PLT. Furthermore, MGT lessens the need for fiscal expansions to supplement monetary policy in fighting recessions.

While the framework we employ is a stylized, but common, New Keynesian model, our findings suggest a productive avenue for future research will be to explore the re-introduction of money into monetary policy in a wider class of model environments.

Here is a link to the current draft of the paper. The final JMCB version should be available soon.