 Monetary policy rules and zero lower bound on nominal interest rates in a cost-channel economyLasitha R.C. Pathberiya Economic Modelling, 2024, vol. 139, issue C Abstract: This study analyzed monetary policy rules in a cost-channel economy with a zero lower bound on nominal interest rates (ZLB). The cost channel reflects the supply-side effects of the monetary policy. The ZLB is considered an occasionally binding constraint in a new Keynesian setting. Taylor-type interest rules represent the monetary policy rules, and the novel forward guidance rule introduced in this study is anticipated and endogenous. Under monetary policy rules, a cost-channel economy is more likely to fall into a liquidity trap and remain there longer than a no-cost-channel economy. Accordingly, monetary policy transmission differs from that in a no-cost-channel economy in the ZLB presence. Furthermore, if agents expect future recessions, achieving the inflation target is more challenging in cost-channel economies. Irrespective of the existence of a cost channel, the forward guidance rule reduces the frequency and depth of liquidity-trapped recessions compared to the Taylor-type rules and avoids deflation bias. Keywords: Cost channel of monetary policy; Zero rates on nominal interest rates; Interest rate rules; Forward guidance rules; Inflation bias; Deflation bias (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:139:y:2024:i:c:s0264999324001640 DOI: 10.1016/j.econmod.2024.106808 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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