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Title:Discretionary monetary policy and the zero lower bound on nominal interest rates PDF Logo
Authors:Adam, Klaus
Billi, Roberto M.
Issue Date:2005
Series/Report no.:CFS Working Paper 2005/16
Abstract:Ignoring the existence of the zero lower bound on nominal interest rates one considerably understates the value of monetary commitment in New Keynesian models. A stochastic forward-looking model with lower bound, calibrated to the U.S. economy, suggests that low values for the natural rate of interest lead to sizeable output losses and deflation under discretionary monetary policy. The fall in output and deflation are much larger than in the case with policy commitment and do not show up at all if the model abstracts from the existence of the lower bound. The welfare losses of discretionary policy increase even further when inflation is partly determined by lagged inflation in the Phillips curve. These results emerge because private sector expectations and the discretionary policy response to these expectations reinforce each other and cause the lower bound to be reached much earlier than under commitment.
Subjects:Nonlinear Optimal Policy
Occasionally Binding Constraint
Sequential Policy
Markov Perfect Equilibrium
Liquidity Trap
JEL:E31
E52
Persistent Identifier of the first edition:urn:nbn:de:hebis:30-10925
Document Type:Working Paper
Appears in Collections:CFS Working Paper Series, Universität Frankfurt a. M.

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