Optimal monetary policy under commitment with a zero bound on nominal interest rates
Klaus Adam and
Roberto Billi
No 377, Working Paper Series from European Central Bank
Abstract:
We determine optimal monetary policy under commitment in a forwardlooking New Keynesian model when nominal interest rates are bounded below by zero. The lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear. A calibration to the U.S. economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound. Rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached. While the empirical magnitude of U.S. mark-up shocks seems too small to entail zero nominal interest rates, shocks affecting the natural real interest rate plausibly lead to a binding lower bound. Under optimal policy, however, this occurs quite infrequently and does not require targeting a positive average rate of inflation. JEL Classification: C63, E31, E52
Keywords: commitment; liquidity trap; new keynesian; Nonlinear optimal policy; zero interest rate bound (search for similar items in EconPapers)
Date: 2004-07
Note: 321199
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)
Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp377.pdf (application/pdf)
Related works:
Journal Article: Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates (2006) 
Working Paper: Optimal monetary policy under commitment with a zero bound on nominal interest rates (2005) 
Working Paper: Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates (2004) 
Working Paper: Optimal monetary policy under commitment with a zero bound on nominal interest rates (2004) 
Working Paper: Optimal Monetary Policy Under Commitment with a Zero Bound on Nominal Interest Rates (2003) 
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:ecb:ecbwps:2004377
Access Statistics for this paper
More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().