Risk Premium Shocks and the Zero Bound on Nominal Interest Rates
AbstractThere appears to be a disconnect between the importance of the zero bound on nominal interest rates in the real-world and predictions from quantitative DSGE models. Recent economic events have reinforced the relevance of the zero bound for monetary policy whereas quantitative models suggest that the zero bound does not constrain (optimal) monetary policy. This paper attempts to shed some light on this disconnect by studying a broader range of shocks within a standard DSGE model. Without denying the possibility of other factors, we find that risk premium shocks are key to building quantitative models where the zero bound is relevant for monetary policy design. The risk premium mechanism operates by increasing the spread between the rates of return on private capital and risk-free government bonds. Other common shocks, such as aggregate productivity, investment-specific productivity, government spending and money demand shocks, are unable to push nominal bond rates close to zero as the same risk premium spread mechanism is not at play.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 09-27.
Length: 40 pages
Date of creation: 2009
Date of revision:
Contact details of provider:
Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
Monetary policy framework;
Other versions of this item:
- Robert Amano & Malik Shukayev, 2012. "Risk Premium Shocks and the Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1475-1505, December.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-17 (All new papers)
- NEP-CBA-2009-10-17 (Central Banking)
- NEP-DGE-2009-10-17 (Dynamic General Equilibrium)
- NEP-MAC-2009-10-17 (Macroeconomics)
- NEP-MON-2009-10-17 (Monetary Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Julio Carrillo & Celine Poilly, 2013.
"Online Appendix to "How do financial frictions affect the spending multiplier during a liquidity trap?","
12-54, Review of Economic Dynamics.
- Julio Carrillo & Celine Poilly, 2013. "How do financial frictions affect the spending multiplier during a liquidity trap?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 296-311, April.
- J. A. Carrillo & C. Poilly, 2012. "How do financial frictions affect the spending multiplier during a liquidity trap?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/779, Ghent University, Faculty of Economics and Business Administration.
- Julio A. CARRILLO & Celine POILLY, 2010. "On the Recovery Path during a Liquidity Trap: Do Financial Frictions Matter for Fiscal Multipliers?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2010034, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- Kaufmann, Daniel & Bäurle, Gregor, 2013. "Exchange Rate and Price Dynamics at the Zero Lower Bound," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79872, Verein für Socialpolitik / German Economic Association.
- Rossana MEROLA, 2012.
"Monetary policy and fiscal stimulus with the zero lower bound and financial frictions,"
Discussion Papers (IRES - Institut de Recherches Economiques et Sociales)
2012024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- Merola, Rossana, 2010. "Financial frictions and the zero lower bound on interest rates: a DSGE analysis," MPRA Paper 29365, University Library of Munich, Germany.
- Christopher M. Gunn & Alok Johri, 2012. "News, Credit Spreads and Default Costs: An expectations-driven interpretation of the recent boom-bust cycle in the U.S," Department of Economics Working Papers 2012-04, McMaster University.
- Gunn, Christopher M. & Johri, Alok, 2013.
"An expectations-driven interpretation of the “Great Recession”,"
Journal of Monetary Economics,
Elsevier, vol. 60(4), pages 391-407.
- Christopher M. Gunn & Alok Johri, 2010. "An Expectations-Driven Interpretation of the "Great Recession"," Carleton Economic Papers 13-02, Carleton University, Department of Economics, revised 22 Feb 2013.
- Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2012.
"The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?,"
Review of Economic Studies,
Oxford University Press, vol. 79(4), pages 1371-1406.
- Yuriy Gorodnichenko & Johannes Wieland & Olivier Coibion, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," 2012 Meeting Papers 70, Society for Economic Dynamics.
- Sami Alpanda & Gino Cateau & Césaire Meh, 2014. "A Policy Model to Analyze Macroprudential Regulations and Monetary Policy," Working Papers 14-6, Bank of Canada.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.