Advanced Search
MyIDEAS: Login to save this paper or follow this series

Global dynamics at the zero lower bound

Contents:

Author Info

  • William T. Gavin
  • Benjamin D. Keen
  • Alexander Richter
  • Nathaniel Throckmorton

Abstract

This article presents global solutions to standard New Keynesian models to show how economic dynamics change when the nominal interest rate is constrained at its zero lower bound (ZLB). We focus on the canonical New Keynesian model without capital, but we also study the model with capital, with and without investment adjustment costs. Our solution method emphasizes accuracy to capture the expectational effects of hitting the ZLB and returning to a positive interest rate. We find that the response to a technology shock has perverse consequences when the ZLB binds, even when a discount factor shock drives the interest rate to zero. Although we do not model the large scale asset purchases used by the Fed since 2009, our results suggest that the economy may have trouble recovering if the interest rate remains at zero. Given the perverse dynamics at the ZLB, we evaluate how monetary policy affects the likelihood of encountering the ZLB. We find that the probability of hitting the ZLB depends importantly on the monetary policy rule. A policy rule based on a dual mandate, such as the one proposed by Taylor (1993), is more likely to cause ZLB events when the central bank places greater emphasis on the output gap.

Download Info

If 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.
File URL: http://research.stlouisfed.org/wp/2013/2013-007.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-007.

as in new window
Length:
Date of creation: 2013
Date of revision:
Handle: RePEc:fip:fedlwp:2013-007

Contact details of provider:
Postal: P.O. Box 442, St. Louis, MO 63166
Fax: (314)444-8753
Web page: http://www.stlouisfed.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords: Monetary policy ; Bonds;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Wilbur John Coleman II, 1989. "Equilibrium in a production economy with an income tax," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 366, Board of Governors of the Federal Reserve System (U.S.).
  2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(6), pages 1702-1725, September.
  3. Bullard, James B., 2013. "Seven Faces of "The Peril"," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 613-628.
  4. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor principle," Research Working Paper, Federal Reserve Bank of Kansas City RWP 05-13, Federal Reserve Bank of Kansas City.
  5. Jesús Fernández-Villaverde & Grey Gordon & Pablo Guerrón-Quintana & Juan F. Rubio-Ramírez, 2012. "Nonlinear adventures at the zero lower bound," Working Papers 12-10, Federal Reserve Bank of Philadelphia.
  6. 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, Society for Economic Dynamics 70, Society for Economic Dynamics.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(1), pages 1-45, February.
  8. Mertens, Karel & Ravn, Morten O., 2010. "Fiscal Policy in an Expectations Driven Liquidity Trap," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7931, C.E.P.R. Discussion Papers.
  9. S. Boragan Aruoba & Frank Schorfheide, 2013. "Macroeconomic dynamics near the ZLB: a tale of two equilibria," Working Papers 13-29, Federal Reserve Bank of Philadelphia.
  10. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 44, pages 47-82, 02.
  11. Michael T. Kiley, 2003. "Why Is Inflation Low When Productivity Growth Is High?," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 41(3), pages 392-406, July.
  12. Klaus Adam & Roberto M. Billi, 2005. "Optimal monetary policy under commitment with a zero bound on nominal interest rates," Research Working Paper, Federal Reserve Bank of Kansas City RWP 05-07, Federal Reserve Bank of Kansas City.
  13. Todd B. Walker & Alexander W. Richter & Nathaniel A. Throckmorton, 2014. "Accuracy, Speed and Robustness of Policy Function Iteration," Auburn Economics Working Paper Series, Department of Economics, Auburn University auwp2014-08, Department of Economics, Auburn University.
  14. Susanto Basu & Brent Bundick, 2012. "Uncertainty Shocks in a Model of Effective Demand," NBER Working Papers 18420, National Bureau of Economic Research, Inc.
  15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  16. Eberly, Janice C., 1997. "International evidence on investment and fundamentals," European Economic Review, Elsevier, vol. 41(6), pages 1055-1078, June.
  17. Anton Nakov, 2006. "Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate," Banco de Espa�a Working Papers 0637, Banco de Espa�a.
  18. Olivier Coibion & Yuriy Gorodnichenko & Johannes F. Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," NBER Working Papers 16093, National Bureau of Economic Research, Inc.
  19. David Reifschneider & John C. Williams, 1999. "Three lessons for monetary policy in a low inflation era," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-44, Board of Governors of the Federal Reserve System (U.S.).
  20. Alexander L. Wolman, 2003. "Real implications of the zero bound on nominal interest rates," Working Paper, Federal Reserve Bank of Richmond 03-15, Federal Reserve Bank of Richmond.
  21. Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(5), pages 813-35, October.
  22. Christopher Gust & David Lopez-Salido & Matthew E. Smith, 2012. "The empirical implications of the interest-rate lower bound," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-83, Board of Governors of the Federal Reserve System (U.S.).
  23. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(3), pages 625-31, August.
  24. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(s1), pages 199-215, 09.
  25. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  26. S. Borağan Aruoba & Pablo Cuba-Borda & Frank Schorfheide, 2013. "Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries," NBER Working Papers 19248, National Bureau of Economic Research, Inc.
  27. R. Anton Braun & Lena Mareen Körber & Yuichiro Waki, 2012. "Some unpleasant properties of log-linearized solutions when the nominal rate is zero," Working Paper, Federal Reserve Bank of Atlanta 2012-05, Federal Reserve Bank of Atlanta.
  28. Stephanie Schmitt-Grohé & Martín Uribe, 2012. "The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery," NBER Working Papers 18544, National Bureau of Economic Research, Inc.
  29. Hatcher, Michael C., 2011. "Inflation versus price-level targeting and the zero lower bound: Stochastic simulations from the Smets-Wouters US model," Cardiff Economics Working Papers E2011/24, Cardiff University, Cardiff Business School, Economics Section.
  30. Narayana R. Kocherlakota, 2005. "Optimal monetary policy: what we know and what we don’t know," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Oct, pages 10-19.
  31. William B. Peterman, 2012. "Reconciling micro and macro estimates of the Frisch labor supply elasticity," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-75, Board of Governors of the Federal Reserve System (U.S.).
  32. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 47(5), pages 1267-86, September.
  33. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  34. William T. Gavin & Benjamin D. Keen, 2012. "The zero lower bound and the dual mandate," Working Papers, Federal Reserve Bank of St. Louis 2012-026, Federal Reserve Bank of St. Louis.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Maria Lucia Florez-Jimenez & Julian A. Parra-Polania, 2014. "Forward guidance with an escape clause: When half a promise is better than a full one," Borradores de Economia 811, Banco de la Republica de Colombia.
  2. Yasuo Hirose & Atsushi Inoue, 2013. "Zero Lower Bound and Parameter Bias in an Estimated DSGE Model," UTokyo Price Project Working Paper Series 012, University of Tokyo, Graduate School of Economics.
  3. Gauti Eggertsson & Andrea Ferrero & Andrea Raffo, 2013. "Can structural reforms help Europe?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1092, Board of Governors of the Federal Reserve System (U.S.).
  4. Yi Wen, 2013. "Evaluating unconventional monetary policies -why aren’t they more effective?," Working Papers, Federal Reserve Bank of St. Louis 2013-028, Federal Reserve Bank of St. Louis.
  5. Alexander W. Richter & Nathaniel A. Throckmorton, 2014. "The Zero Lower Bound: Frequency, Duration, and Numerical Convergence," Auburn Economics Working Paper Series, Department of Economics, Auburn University auwp2014-09, Department of Economics, Auburn University.
  6. Gavin, William T. & Keen, Benjamin D. & Richter, Alexander & Throckmorton, Nathaniel, 2013. "The stimulative effect of forward guidance," Working Papers, Federal Reserve Bank of St. Louis 2013-38, Federal Reserve Bank of St. Louis, revised 30 Apr 2014.
  7. Plante, Michael D. & Richter, Alexander & Throckmorton, Nathaniel, 2014. "The zero lower bound and endogenous uncertainty," Working Papers 1405, Federal Reserve Bank of Dallas.
  8. Campbell Leith & Ding Liu, 2014. "The in‡flation bias under Calvo and Rotemberg pricing," Working Papers, Business School - Economics, University of Glasgow 2014_06, Business School - Economics, University of Glasgow.
  9. Todd B. Walker & Alexander W. Richter & Nathaniel A. Throckmorton, 2014. "Accuracy, Speed and Robustness of Policy Function Iteration," Auburn Economics Working Paper Series, Department of Economics, Auburn University auwp2014-08, Department of Economics, Auburn University.
  10. Viktors Ajevskis, 2013. "Non-Local Solutions to Dynamic Equilibrium Models: the Approximate Stable Manifolds Approach," Working Papers 2013/03, Latvijas Banka.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2013-007. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.