Optimal monetary policy under commitment with a zero bound on nominal interest rates : [Version: May 7, 2004]

  • We determine optimal monetary policy under commitment in a forwardlooking New Keynesian model when nominal interest rates are bounded below by zero. The lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear. A calibration to the U.S. economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound. Rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached. While the empirical magnitude of U.S. mark-up shocks seems too small to entail zero nominal interest rates, shocks affecting the natural real interest rate plausibly lead to a binding lower bound. Under optimal policy, however, this occurs quite infrequently and does not require targeting a positive average rate of inflation. Interestingly, the presence of binding real rate shocks alters the policy response to (non-binding) mark-up shocks. JEL Klassifikation: C63, E31, E52 .

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Metadaten
Author:Klaus AdamORCiDGND, Roberto M. Billi
URN:urn:nbn:de:hebis:30-10647
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2004,13
Series (Serial Number):CFS working paper series (2004, 13)
Document Type:Working Paper
Language:English
Year of Completion:2004
Year of first Publication:2004
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:New Keynesian; commitment; liquidity trap; nonlinear optimal policy; zero interest rate bound
GND Keyword:Geldpolitik; Zerobond; Nominalzins
Issue:This Version: May 7, 2004
HeBIS-PPN:222204699
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht