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Theoretical analysis regarding a zero lower bound on nominal interest rates

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  • Bennett T. McCallum

Abstract

This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic stabilizing properties of Taylor rules in a ZLB context. The most important argument, however, is that if the short nominal rate is immobilized at zero, there nevertheless exists a route for monetary stabilization policy to be effective--via the foreign exchange market. Its quantitative importance is examined in a calibrated, optimizing, open-economy model.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal Conference Series ; [Proceedings].

Volume (Year): (2000)
Issue (Month): ()
Pages: 870-935

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Handle: RePEc:fip:fedbcp:y:2000:p:870-935

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Keywords: Monetary policy ; Inflation (Finance) ; Interest rates ; Foreign exchange market;

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