Monetary Policy When Interest Rates Are Bounded At Zero

Jeffrey Fuhrer and Brian F. Madigan

The Review of Economics and Statistics, 1997, vol. 79, issue 4, 573-585

Abstract: This paper assesses the importance of the zero lower bound on nominal interest rates for the interest-rate channel of monetary policy. We simulate several interest-rate setting policy rules with either high or low inflation targets. We determine the extent to which the zero bound prevents real rates from falling, thus cushioning aggregate output in response to negative spending shocks. For small temporary and large permanent shocks, the output path with zero inflation lies modestly below that for higher inflation. For large shocks persisting a few quarters, differences in output paths across high- and low-inflation scenarios can be larger. © 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Date: 1997
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Related works:
Working Paper: Monetary policy when interest rates are bounded at zero (1994)
Working Paper: Monetary policy when interest rates are bounded at zero (1994)
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