A NOTE ON THE SLOPE OF THE AGGREGATE DEMAND CURVE AT THE ZERO LOWER BOUND

Yangyang Ji and Wei Xiao

Macroeconomic Dynamics, 2022, vol. 26, issue 4, 1107-1126

Abstract: This paper analyzes a regime-switching New Keynesian model to understand what happens to the aggregate economy when the nominal interest rate hits the zero lower bound (ZLB). Contrary to the literature, our model predicts that the aggregate demand curve is not always upward sloping when the ZLB binds. Instead, it depends on expectations. If the expected duration of the ZLB is short but consistent with expectations surveys, the AD curve can be downward sloping. In that case, the fiscal multiplier is moderate and supply-side reforms are expansionary. These results complement existing findings in the literature.

Date: 2022
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