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Speculative runs on interest rate pegs

Bassetto, M; Phelan, C; (2015) Speculative runs on interest rate pegs. Journal of Monetary Economics 10.1016/j.jmoneco.2015.03.002. (In press). Green open access

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Abstract

We analyze a new class of equilibria that emerges when a central bank conducts monetary policy by setting an interest rate (as an arbitrary function of its available information) and letting the private sector set the quantity traded. These equilibria involve a run on the central bank's interest target, whereby money grows fast, private agents borrow as much as possible against the central bank, and the shadow interest rate is different from the policy target. We argue that these equilibria represent a particular danger when banks hold large excess reserves, such as is the case following periods of quantitative easing. Our analysis suggests that successfully managing the exit strategy requires additional tools beyond setting interest-rate targets and paying interest on reserves; in particular, freezing excess reserves or fiscal-policy intervention may be needed to fend off adverse expectations.

Type: Article
Title: Speculative runs on interest rate pegs
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.jmoneco.2015.03.002
Publisher version: http://dx.doi.org/10.1016/j.jmoneco.2015.03.002
Language: English
Additional information: © 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/1408031
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