If monetary policy succeeds in keeping average inflation very low, nominal interest rates may occasionally be constrained by the zero lower bound. The degree to which this constraint has real implications depends on the monetary policy feedback rule and the structure of price-setting. Policy rules that make the price level stationary lead to small real distortions from the zero bound. If policy imparts persistence into the inflation rate, the real implications of the zero bound are large in the presence of backward looking price-setting, and small if prices are set to maximize profits.
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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number
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Aubhik Khan & Robert G. King & Alexander L. Wolman, 2000.
"Optimal monetary policy,"
Working Paper
00-10, Federal Reserve Bank of Richmond.
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Aubhik Khan & Robert King & Alexander L. Wolman, 2002.
"Optimal monetary policy,"
Working Papers
02-19, Federal Reserve Bank of Philadelphia.
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Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001.
"Optimal monetary policy,"
Working Papers
01-5, Federal Reserve Bank of Philadelphia.
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Aubhik Khan & Robert G. King & Alexander L. Wolman, 2002.
"Optimal Monetary Policy,"
NBER Working Papers
9402, National Bureau of Economic Research, Inc.
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Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003.
"Optimal Monetary Policy,"
Review of Economic Studies,
Blackwell Publishing, vol. 70(4), pages 825-860, October.
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Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001.
"The Perils of Taylor Rules,"
Journal of Economic Theory,
Elsevier, vol. 96(1-2), pages 40-69, January.
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Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 1998.
"The Perils of Taylor Rules,"
Working Papers
98-37, C.V. Starr Center for Applied Economics, New York University.
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