Discretionary monetary policy and the zero lower bound on nominal interest rates

Ignoring the existence of the zero lower bound on nominal interest rates one considerably understates the value of monetary commitment in New Keynesian models. A stochastic forward-looking model with lower bound, calibra
Ignoring the existence of the zero lower bound on nominal interest rates one considerably understates the value of monetary commitment in New Keynesian models. A stochastic forward-looking model with lower bound, calibrated to the U.S. economy, suggests that low values for the natural rate of interest lead to sizeable output losses and deflation under discretionary monetary policy. The fall in output and deflation are much larger than in the case with policy commitment and do not show up at all if the model abstracts from the existence of the lower bound. The welfare losses of discretionary policy increase even further when inflation is partly determined by lagged inflation in the Phillips curve. These results emerge because private sector expectations and the discretionary policy response to these expectations reinforce each other and cause the lower bound to be reached much earlier than under commitment. JEL Klassifikation: E31, E52
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Metadaten
Author:Klaus Adam, Roberto Billi
URN:urn:nbn:de:hebis:30-10925
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2005,16
Series (Serial Number):CFS working paper series (2005, 16)
Document Type:Working Paper
Language:English
Year of Completion:2005
Year of first Publication:2005
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:Liquidity Trap; Markov Perfect Equilibrium; Nonlinear Optimal Policy; Occasionally Binding Constraint; Sequential Policy
SWD-Keyword:Gleichgewicht; Liquiditätspräferenztheorie; Markov-Modell
Issue:Current Version: March 14, 2005
Note:
First Version: October 3, 2003. Current Version: March 14, 2005.
HeBIS PPN:197172008
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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