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Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates

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  • Bennett T. McCallum

Abstract

This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic stabilizing properties of Taylor rules in a ZLB context. The most important argument, however, is that if the short nominal rate is immobilized at zero, there nevertheless exists a route for monetary stabilization policy to be effective--- via the foreign exchange market. Its quantitative importance is examined in a calibrated, optimizing, open-economy model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7677.

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Date of creation: Apr 2000
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Handle: RePEc:nbr:nberwo:7677

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