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The macroeconomic effects of low and falling inflation at the zero lower bound

Stefano Neri () and Alessandro Notarpietro ()

No 1040, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper assesses the macroeconomic consequences of a prolonged period of low and falling inflation when monetary policy is constrained by the zero lower bound (ZLB) on short-term nominal interest rates, the private sector is indebted in nominal terms (debt deflation mechanism) and nominal wages are downward rigid. Cost-push shocks that in normal circumstances would reduce inflation and stimulate output have contractionary effects on economic activity, once the ZLB interacts with the debt deflation mechanism. The contractionary effects are larger and more persistent when nominal wages cannot be reduced and when the private sector is highly indebted.

Keywords: DSGE models; zero lower bound; debt-deflation channel; down- ward nominal wage rigidities. (search for similar items in EconPapers)
JEL-codes: E21 E31 E37 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2015-11
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1040_15

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