Optimal Monetary Policy with r*

Anton Nakov, Roberto Billi and Jordi Galí
Authors registered in the RePEc Author Service: Jordi Galí

No 1333, Working Papers from Barcelona School of Economics

Abstract: We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, and in which the steady state natural rate (r*) is negative. We show that the optimal policy aims to approach gradually a steady state with positive average inflation. Around that steady state, inflation and output fluctuate optimally in response to shocks to the natural rate. The central bank can implement that optimal outcome by means of an appropriate state-contingent rule, even though in equilibrium the nominal rate remains at zero most (or all) of the time. In order to establish that result, we derive sufficient conditions for local determinacy in a more general model with endogenous regime switches.

Keywords: New Keynesian model; secular stagnation; zero lower bound; decline in r*; equilibrium determinacy; regime switching models (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://bw.bse.eu/wp-content/uploads/2022/03/1333-file.pdf (application/pdf)

Related works:
Journal Article: Optimal monetary policy with r∗<0 (2024)
Working Paper: Optimal Monetary Policy with r* (2024)
Working Paper: Optimal Monetary Policy with r* (2023)
Working Paper: Optimal Monetary Policy with r* (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1333

Access Statistics for this paper

More papers in Working Papers from Barcelona School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Bruno Guallar ().