Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130650
Authors: 
Duarte, Fernando
Zabai, Anna
Year of Publication: 
2015
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 745
Abstract: 
We propose a new interest rate rule that implements the optimal equilibrium and eliminates all indeterminacy in a canonical New Keynesian model in which the zero lower bound on nominal interest rates (ZLB) is binding. The rule commits to zero nominal interest rates for a length of time that increases in proportion to how much past inflation has deviated - either upward or downward - from its optimal level. Once outside the ZLB, interest rates follow a standard Taylor rule. Following the Taylor principle outside the ZLB is neither necessary nor sufficient to ensure uniqueness of equilibria. Instead, the key principle is to respond strongly enough to deviations of past inflation from optimal levels by sufficiently increasing the amount of time interest rates are promised to be kept at zero.
Subjects: 
zero lower bound
ZLB
liquidity trap
New Keynesian model
indeterminacy
monetary policy
Taylor rule
Taylor principle
interest rate rule
forward guidance
JEL: 
E43
E52
E58
Document Type: 
Working Paper

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