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

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Author Info
Roberto M. Billi () (- Center for Financial Studies)

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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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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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Find related papers by JEL classification:
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
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

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    Other versions:
  3. 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)
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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 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:
  2. Roberto M. Billi, 2007. "Optimal inflation for the U.S," Research Working Paper RWP 07-03, Federal Reserve Bank of Kansas City. [Downloadable!]
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