Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero

This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochasti
This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s and 1990s, the consequences of the zero bound are negligible for target inflation rates as low as 2 percent. However, the effects of the constraint are non-linear with respect to the inflation target and produce a quantitatively significant deterioration of the performance of the economy with targets between 0 and 1 percent. The variability of output increases significantly and that of inflation also rises somewhat. Also, we show that the asymmetry of the policy ineffectiveness induced by the zero bound generates a non-vertical long-run Phillips curve. Output falls increasingly short of potential with lower inflation targets.
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Metadaten
Author:Günter Coenen, Athanasios Orphanides, Volker Wieland
URN:urn:nbn:de:hebis:30-10195
Parent Title (German):CFS working paper series ; 2003, 13
Series (Serial Number):CFS working paper series (2003, 13)
Document Type:Working Paper
Language:English
Date of Publication (online):2005/06/13
Year of first Publication:2003
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2005/06/13
Tag:inflation targeting ; liquidity trap; monetary policy rules ; price stability
Source:CFS working paper ; 2003,13
HeBIS PPN:204001544
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:E31 Price Level; Inflation; Deflation
E52 Monetary Policy
E58 Central Banks and Their Policies
E61 Policy Objectives; Policy Designs and Consistency; Policy Coordination
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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