Optimal Monetary Policy with r*

Roberto Billi, Jordi Galí () and Anton Nakov
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Jordi Galí: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3418866

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, and in which the steady state natural rate (r*) is negative. We show that the optimal policy aims to approach gradually a steady state with positive average inflation. Around that steady state, inflation and output fluctuate optimally in response to shocks to the natural rate. The central bank can implement that optimal outcome by means of an appropriate state-contingent rule, even though in equilibrium the nominal rate remains at zero most (or all) of the time. In order to establish that result, we derive sufficient conditions for local determinacy in a more general model with endogenous regime switches.

Keywords: zero lower bound; New Keynesian model; decline in r*; equilibrium determinacy; regime switching models; secular stagnation (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Optimal Monetary Policy with r* (2024)
Working Paper: Optimal Monetary Policy with r* (2023)
Working Paper: Optimal Monetary Policy with r* (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1830

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