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The Optimal Inflation Buffer with a Zero Bound Author info | Abstract | Publisher info | Download info | Related research | Statistics Roberto Billi () (Center for Financial Studies)
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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.
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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2005/17.
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Length: 41 pages
Date of creation: 17 Jan 2005Date of revision:
Handle: RePEc:cfs:cfswop:wp200517Contact details of provider: Postal: House of Finance, Gr�neburgplatz 1, HPF H5, D-60323 Frankfurt am Main Phone: +49 (0)69 798-30050 Fax: +49 (0)69 798-30077 Email: Web page: http://www.ifk-cfs.de/ More information through EDIRC
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Keywords: Inflation Inertia ; Downward Nominal Rigidity ; Nonlinear Policy ; Liquidity Trap ; Other versions of this item:
Find related papers by JEL classification: C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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