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| Title: | | The optimal inflation buffer with a zero bound on nominal interest rates  |
| Authors: | | Billi, Roberto M. |
| Issue Date: | | 2004 |
| Series/Report no.: | | CFS Working Paper 2005/17 |
| Abstract: | | This paper characterizes the optimal inflation buffer consistent with a zero lower bound on nominal interest rates in a New Keynesian sticky-price model. It is shown that a purely forward-looking version of the model that abstracts from inflation inertia would significantly underestimate the inflation buffer. If the central bank follows the prescriptions of a welfaretheoretic objective, a larger buffer appears optimal than would be the case employing a traditional loss function. Taking also into account potential downward nominal rigidities in the price-setting behavior of firms appears not to impose significant further distortions on the economy. |
| Subjects: | | Inflation Inertia Downward Nominal Rigidity Nonlinear Policy Liquidity Trap |
| JEL: | | C63 E31 E52 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CFS Working Paper Series, Universität Frankfurt a. M.
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