Monetary Policy under a Liquidity Trap: Simulation Evidence for the Euro Area

In this paper, we analyze the conduct of monetary policy under a zero nominal interest-rate bound (hereafter ZIB) in a model economy of the euro area, namely that of the Area Wide Model. The aggregate euro-area economy is modeled to have relatively sluggish adjustment properties and a private sector with mainly backward-looking expectations. For a given ZIB benchmark, we consider variations in the monetary-policy reaction function to minimize the macro-economic consequences of such a deflationary regime. We rank the effectiveness of these remedial policies using a number of metrics and relate our results to features and properties of the model economy.