Monetary Policy, Incomplete Information, and the Zero Lower Bound

Christopher Gust (), Benjamin K. Johannsen () and J. David López-Salido ()
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Christopher Gust: Board of Governors of the Federal Reserve System
Benjamin K. Johannsen: Board of Governors of the Federal Reserve System
J. David López-Salido: Board of Governors of the Federal Reserve System

IMF Economic Review, 2017, vol. 65, issue 1, No 3, 37-70

Abstract: Abstract In the context of a stylized New Keynesian model, we explore the interaction between imperfect knowledge about the state of the economy and the zero lower bound. We show that optimal policy under discretion near the zero lower bound responds to signals about an increase in the equilibrium real interest rate by less than it would when far from the zero lower bound. In addition, we show that Taylor-type rules that either include a time-varying intercept that moves with perceived changes in the equilibrium real rate or respond aggressively to deviations of inflation and output from their target levels perform similarly to optimal discretionary policy. Our analysis of first-difference rules highlights that rules with interest rate smoothing terms carry forward current and past misperceptions about the state of the economy and can lead to suboptimal performance.

Keywords: E32; E52 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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DOI: 10.1057/s41308-016-0023-z

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