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The Zero Lower Bound: Frequency, Duration, and Determinacy

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  • Alexander W. Richter
  • Nathaniel A. Throckmorton

Abstract

When monetary policy faces a zero lower bound (ZLB) constraint on the nominal interest rate, determinacy is not guaranteed even if the Taylor principle is satisfied when the ZLB does not bind. This paper shows the boundary of the determinacy region imposes a clear tradeoff between the expected frequency and average duration of ZLB events. We show this tradeoff using a global solution to a nonlinear New Keynesian model with two alternative stochastic processes?one where monetary policy follows a 2-state Markov chain, which exogenously governs whether the ZLB binds, and the other where ZLB events arise endogenously due to technology shocks. In both cases, the household accounts for the possibility of going to and exiting the ZLB in expectation. We quantify the expectation al effect of the ZLB and show it depends on the parameters of the stochastic process.

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Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2013-16.

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Date of creation: Oct 2013
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Handle: RePEc:abn:wpaper:auwp2013-16

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Keywords: Monetary policy; zero lower bound; determinacy; global solution method;

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