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Infrequent but Long-Lived Zero Lower Bound Episodes and the Optimal Rate of Inflation

Marc Dordal i Carreras, Olivier Coibion, Yuriy Gorodnichenko and Johannes Wieland ()
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Marc Dordal i Carreras: Department of Economics, University of California, Berkeley, California 94720

Annual Review of Economics, 2016, vol. 8, issue 1, 497-520

Abstract: Countries rarely hit the zero lower bound (ZLB) on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to incorporate jointly into macroeconomic models using typical representations of shock processes. We introduce a regime-switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. We discuss what different calibrations of this model imply for optimal inflation rates.

Keywords: optimal inflation; zero lower bound (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:anr:reveco:v:8:y:2016:p:497-520