Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25420
Authors: 
Billi, Roberto M.
Year of Publication: 
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
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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