Optimal Monetary Policy with r*

Roberto Billi, Jordi Galí () and Anton Nakov
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Jordi Galí: CREI, UPF and BSE

No 433, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, when the steady state natural rate (r*) becomes permanently negative. We show that the optimal policy aims to approach gradually a new steady state with positive average inflation. Around that steady state, the optimal policy implies well defined (second-best) paths for inflation and output in response to shocks to the natural rate. Under plausible calibrations, the optimal policy implies that the nominal rate remains at its ZLB most of the time. Despite the latter feature, the central bank can implement the optimal outcome as a unique equilibrium by means of an appropriate nonlinear interest rate rule. In order to establish that result, we derive sufficient conditions for local determinacy in a general model with endogenous regime switches.

Keywords: zero lower bound; New Keynesian model; decline in r*; equilibrium determinacy; regime switching models; secular stagnat (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2024-03-01
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: Optimal monetary policy with r∗<0 (2024)
Working Paper: Optimal Monetary Policy with r* (2023)
Working Paper: Optimal Monetary Policy with r* (2022)
Working Paper: Optimal Monetary Policy with r* (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0433

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