Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates

Bennett McCallum

Journal of Money, Credit and Banking, 2000, vol. 32, issue 4, 870-904

Abstract: This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic stabilizing properties of Taylor rules in a ZLB context. The most important argument, however, is that if the short nominal rate is immobilized at zero, there nevertheless exists a route for monetary stabilization policy to be effective-via the foreign exchange market. Its quantitative importance is examined in a calibrated, optimizing, open-economy model.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:32:y:2000:i:4:p:870-904

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