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The Optimal Inflation Buffer with a Zero Bound on Nominal Interest Rates

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  • Roberto M. Billi

    ()
    (- Center for Financial Studies)

Abstract

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 welfare-theoretic 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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File URL: http://repec.org/sce2005/up.27221.1104375907.pdf
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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 25.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:25

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Keywords: inflation inertia; downward nominal rigidity; nonlinear policy; liquidity trap;

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Cited by:
  1. Adam, Klaus & Billi, Roberto M., 2007. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 728-752, April.
  2. KIM, Jinill & RUGE-MURCIA, Francisco J., 2007. "How Much Inflation is Necessary to Grease the Wheels?," Cahiers de recherche 11-2007, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Roberto M. Billi, 2007. "Optimal inflation for the U.S," Research Working Paper RWP 07-03, Federal Reserve Bank of Kansas City.
  4. Stefan Gerlach & John Lewis, 2014. "ECB Reaction Functions and the Crisis of 2008," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 137-158, March.
  5. Koppány, Krisztián, 2007. "Likviditási csapda és deflációs spirál egy inflációs célt követő modellben - a hitelesség szerepe
    [A liquidity trap and deflationary spiral in a model for pursuing an inflation target -
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 974-1003.

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