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

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

No 22510, NBER Working Papers from National Bureau of Economic Research, Inc

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. We introduce a regime switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. We discuss what different calibrations of this model imply for optimal inflation rates.

JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: EFG ME
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Published as Marc Dordal i Carreras & Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2016. "Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation," Annual Review of Economics, vol 8(1).

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