An interest rate rule to uniquely implement the optimal equilibrium in a liquidity trap

Fernando Duarte and Anna Zabai

No 745, Staff Reports from Federal Reserve Bank of New York

Abstract: We propose a new interest rate rule that implements the optimal equilibrium and eliminates all indeterminacy in a canonical New Keynesian model in which the zero lower bound on nominal interest rates (ZLB) is binding. The rule commits to zero nominal interest rates for a length of time that increases in proportion to how much past inflation has deviated?either upward or downward?from its optimal level. Once outside the ZLB, interest rates follow a standard Taylor rule. Following the Taylor principle outside the ZLB is neither necessary nor sufficient to ensure uniqueness of equilibria. Instead, the key principle is to respond strongly enough to deviations of past inflation from optimal levels by sufficiently increasing the amount of time interest rates are promised to be kept at zero.

Keywords: indeterminacy; monetary policy; zero lower bound; forward guidance; zero lower bound (ZLB); Taylor principle; liquidity traps; interest rate rules; Taylor rule; New Keynesian model (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015-10-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: The full text of this report is no longer available. For related work, see Fernando Duarte, “How to Escape a Liquidity Trap with Interest Rate Rules,” Federal Reserve Bank of New York Staff Reports, no. 776, May 2016.
References: View references in EconPapers View complete reference list from CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:745

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().