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Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation

Marc Carreras (), Olivier Coibion, Yuriy Gorodnichenko and Johannes Wieland ()

Working Papers from eSocialSciences

Abstract: Countries rarely hit the zero-lower bound on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to jointly incorporate into macroeconomic models using typical representations of shock processes. This paper introduces a regime switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. It discusses what different calibrations of this model imply for optimal inflation rates. [Working Paper 22510]

Keywords: zero-lower bound on interest rates; Optimal Rate of Inflation; macroeconomic models; New Keynesian model; realistic distribution of ZLB durations (search for similar items in EconPapers)
Date: 2016-08
Note: Institutional Papers
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