Real Implications of the Zero Bound on Nominal Interest Rates

Alexander Wolman

No 1152, Computing in Economics and Finance 1999 from Society for Computational Economics

Abstract: When price-setting is staggered and firms choose prices optimally, low inflation regimes (where the nominal interest rate is occasionally zero) do not entail significant distortions to the real economy. By targeting the price level, the monetary authority can generate temporarily expected inflation when nominal rates are zero, pushing real rates down. In contrast, when firms choose their prices according to the Fuhrer-Moore rule, the zero bound causes real distortions. By targeting the price level instead of inflation, however, the monetary authority can lessen those distortions.

Date: 1999-03-01
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Related works:
Journal Article: Real Implications of the Zero Bound on Nominal Interest Rates (2005)
Working Paper: Real implications of the zero bound on nominal interest rates (2003)
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