This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Optimal Monetary Policy Under Commitment with a Zero Bound on Nominal Interest Rates

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Adam, Klaus
Billi, Roberto M

Additional information is available for the following registered author(s):

Abstract

We compute the optimal non-linear interest rate policy under commitment for a forward-looking stochastic model with monopolistic competition and sticky prices when nominal interest rates are bounded below by zero. When the lower bound binds, the optimal policy is to reduce the real rate by generating inflation expectations. This is achieved by committing to increase future interest rates by less than what purely forward-looking policy would suggest. As a result, there is a ‘commitment bias’, i.e., average output and inflation turn out to be higher than their target values. Calibrating the model to the US economy we find that the quantitative importance of the average effects on output and inflation are negligible. Moreover, the empirical magnitude of US mark-up shocks is too small to entail zero nominal interest rates. Real rate shocks, however, plausibly lead to a binding lower bound under optimal policy, albeit relatively infrequently. Interestingly, the presence of binding real rate shocks alters the optimal policy response to (non-binding) mark-up shocks.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.cepr.org/pubs/dps/DP4111.asp
File Format: application/pdf
File Function:
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4111.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: Nov 2003
Date of revision:
Handle: RePEc:cpr:ceprdp:4111

Contact details of provider:
Postal: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

For technical questions regarding this item, or to correct its listing, contact: ().

Related research
Keywords: C63 commitment liquidity trap new keynesian non-linear optimal policy zero interest rate bound

Other versions of this item:

Find related papers by JEL classification:
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

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Coenen, Gunter & Wieland, Volker, 2003. "The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1071-1101, July. [Downloadable!] (restricted)
    Other versions:
  2. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," Levine's Bibliography 506439000000000384, UCLA Department of Economics. [Downloadable!]
    Other versions:
  3. Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," CEPR Discussion Papers 4334, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-2), pages 137-206. [Downloadable!]
  5. Uhlig, Harald, 2000. "Should We be Afraid of Friedman's Rule?," CEPR Discussion Papers 2548, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Christiano, Lawrence J. & Fisher, Jonas D. M., 2000. "Algorithms for solving dynamic models with occasionally binding constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 24(8), pages 1179-1232, July. [Downloadable!] (restricted)
    Other versions:
  7. Klaus Adam & Roberto Billi, 2005. "Discretionary Monetary Policy and the Zero Lower Bound on Nominal Interest Rates," CFS Working Paper Series 2005/16, Center for Financial Studies. [Downloadable!]
    Other versions:
  8. Alan J. Auerbach & Maurice Obstfeld, 2003. "The Case for Open-Market Purchases in a Liquidity Trap," NBER Working Papers 9814, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. George W. Evans & Seppo Honkapohja, 2005. "Policy Interaction, Expectations and the Liquidity Trap," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 303-323, April. [Downloadable!] (restricted)
    Other versions:
  10. R. Kato & S. Nishiyama, 2002. "Optimal Monetary Policy When Interest Rates are Bounded at Zero," Computing in Economics and Finance 2002 8, Society for Computational Economics. [Downloadable!]
    Other versions:
  11. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-66, November.
  12. Michael Woodford, 1998. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 173-219, January. [Downloadable!] (restricted)
    Other versions:
  13. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December. [Downloadable!] (restricted)
    Other versions:
  14. Athanasios Orphanides, 2004. "Monetary policy in deflation: the liquidity trap in history and practice," Finance and Economics Discussion Series 2004-01, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  15. Gauti B. Eggertsson, 2003. "How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible," IMF Working Papers 03/64, International Monetary Fund. [Downloadable!]
  16. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    Other versions:
  17. Adam, Klaus & Billi, Roberto M, 2004. "Optimal Monetary Policy Under Discretion with a Zero Bound on Nominal Interest Rates," CEPR Discussion Papers 4585, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  18. Martin Uribe & Stephanie Schmitt-Grohe, 2001. "Optimal fiscal and monetary policy under sticky prices," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
    Other versions:
  19. Lars E. O. Svensson, 2003. "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 145-166, Fall. [Downloadable!] (restricted)
    Other versions:
  20. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  21. Guenter Coenen & Volker Wieland, 2003. "The Zero-Interest-Rate and the Role of the Exchange Rate for Monetary Policy in Japan," CFS Working Paper Series 2003/09, Center for Financial Studies. [Downloadable!]
  22. Peter N. Ireland, 2004. "Technology Shocks in the New Keynesian Model," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 923-936, 01. [Downloadable!] (restricted)
    Other versions:
  23. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    Other versions:
  24. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Avoiding Liquidity Traps," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 535-563, June. [Downloadable!] (restricted)
    Other versions:
  25. Roberto M. Billi & Klaus Adam, 2004. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 2004 67, Society for Computational Economics. [Downloadable!]
    Other versions:
  26. Marcet, A. & Marimon, R., 1998. "Recursive Contracts," Economics Working Papers eco98/37, European University Institute.
    Other versions:
  27. Lawrence Summers, 1991. "Panel discussion: price stability ; How should long-term monetary policy be determined?," Proceedings, Federal Reserve Bank of Cleveland, pages 625-631.
  28. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 813-35, October.
  29. Willem H. Buiter & Nikolaos Panigirtzoglou, 2003. "Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution," Economic Journal, Royal Economic Society, vol. 113(490), pages 723-746, October. [Downloadable!] (restricted)
  30. Jeffrey C. Fuhrer & Brian F. Madigan, 1997. "Monetary Policy When Interest Rates Are Bounded At Zero," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 573-585, November. [Downloadable!] (restricted)
    Other versions:
  31. Evans, George W & Honkapohja, Seppo, 2003. "Policy Interaction, Expectation and Liquidity Trap," CEPR Discussion Papers 3925, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  32. Wolman, Alexander L, 2005. "Real Implications of the Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 273-96, April.
    Other versions:
  33. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Klaus Adam & Roberto M. Billi, 2004. "Optimal monetary policy under commitment with a zero bound on nominal interest rates," Working Paper Series 377, European Central Bank. [Downloadable!]
    Other versions:
  2. Anton Nakov, 2008. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 73-127, June. [Downloadable!]
    Other versions:
  3. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary policy alternatives at the zero bound: an empirical assessment," Finance and Economics Discussion Series 2004-48, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Klaus Adam & Roberto M. Billi, 2004. "Optimal monetary policy under discretion with a zero bound on nominal interest rates," Working Paper Series 380, European Central Bank. [Downloadable!]
    Other versions:
  5. Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2008. "Adopting Price-Level Targeting under Imperfect Credibility," Working Papers 08-3, Bank of Canada. [Downloadable!]
  6. Roberto Billi, 2005. "The Optimal Inflation Buffer with a Zero Bound," CFS Working Paper Series 2005/17, Center for Financial Studies. [Downloadable!]
  7. Klaus Adam & Roberto Billi, 2005. "Discretionary Monetary Policy and the Zero Lower Bound on Nominal Interest Rates," CFS Working Paper Series 2005/16, Center for Financial Studies. [Downloadable!]
    Other versions:
  8. Michael Woodford, 2005. "Central Bank Communication and Policy Effectiveness," NBER Working Papers 11898, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Junning Cai, 2004. "Liquidity Trap Prevention and Escape: A Simple Proposition," Macroeconomics 0402033, EconWPA. [Downloadable!]
  10. Eijffinger, Sylvester C W & Tesfaselassie, Mewael F., 2005. "Central Bank Forecasts and Disclosure Policy: Why it Pays to be Optimistic," CEPR Discussion Papers 4854, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  11. Roberto M. Billi, 2005. "The Optimal Inflation Buffer with a Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 2005 25, Society for Computational Economics. [Downloadable!]
  12. Paul R. Masson & Malik D. Shukayev, 2008. "Are Bygones not Bygones? Modeling Price Level Targeting with an Escape Clause and Lessons from the Gold Standard," Working Papers 08-27, Bank of Canada. [Downloadable!]
  13. Ernst Juerg Weber, 2007. "The Role of the Real Interest Rate in US Macroeconomic History," Economics Discussion / Working Papers 07-01, The University of Western Australia, Department of Economics. [Downloadable!]
  14. Oliver Grimm & Stefan Ried, 2007. "Macroeconomic Policy in a Heterogeneous Monetary Union," SFB 649 Discussion Papers SFB649DP2007-028, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
    Other versions:
  15. Alexander Bick & Dieter Nautz, 2008. "Inflation Thresholds and Relative Price Variability: Evidence from U.S. Cities," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 61-76, September. [Downloadable!]
  16. Brzoza-Brzezina, Michal & Socha, Jacek, 2006. "Downward nominal wage rigidity in Poland," MPRA Paper 843, University Library of Munich, Germany, revised Nov 2006. [Downloadable!]
  17. Gauti B. Eggertsson, 2006. "Fiscal multipliers and policy coordination," Staff Reports 241, Federal Reserve Bank of New York. [Downloadable!]
  18. Tomohiro Sugo & Yuki Teranishi, 2008. "The Zero Interest Rate Policy," IMES Discussion Paper Series 08-E-20, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
  19. Gauti B. Eggertsson & Benjamin Pugsley, 2007. "The Mistake of 1937: A General Equilibrium Analysis," CFS Working Paper Series 2007/06, Center for Financial Studies. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? Over 77% of the top 1000 economists are registered on RePEc.

This page was last updated on 2008-10-11.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.