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Infrequent but Long-Lived Zero Lower Bound Episodes and the Optimal Rate of Inflation

Author

Listed:
  • Marc Dordal i Carreras

    (Department of Economics, University of California, Berkeley, California 94720)

  • Olivier Coibion

    () (Department of Economics, University of Texas, Austin, Texas 78712
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Yuriy Gorodnichenko

    (Department of Economics, University of California, Berkeley, California 94720
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Johannes Wieland

    (National Bureau of Economic Research, Cambridge, Massachusetts 02138
    Department of Economics, University of California, San Diego, La Jolla, California 92093)

Abstract

Countries rarely hit the zero lower bound (ZLB) on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to incorporate jointly into macroeconomic models using typical representations of shock processes. We introduce a regime-switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. We discuss what different calibrations of this model imply for optimal inflation rates.

Suggested Citation

  • Marc Dordal i Carreras & Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2016. "Infrequent but Long-Lived Zero Lower Bound Episodes and the Optimal Rate of Inflation," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 497-520, October.
  • Handle: RePEc:anr:reveco:v:8:y:2016:p:497-520
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    File URL: http://www.annualreviews.org/doi/10.1146/annurev-economics-080315-015306
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    Cited by:

    1. repec:bin:bpeajo:v:48:y:2017:i:2017-01:p:317-396 is not listed on IDEAS
    2. Deak, S. & Levine, P. & Mirza, A. & Pearlman, J., 2019. "Designing Robust Monetary Policy Using Prediction Pools," Working Papers 19/11, Department of Economics, City University London.
    3. Michael T. Kiley & John M. Roberts, 2017. "Monetary Policy in a Low Interest Rate World," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 317-396.
    4. Tomohide Mineyama & Wataru Hirata & Kenji Nishizaki, 2019. "Inflation and Social Welfare in a New Keynesian Model: The Case of Japan and the U.S," Bank of Japan Working Paper Series 19-E-10, Bank of Japan.

    More about this item

    Keywords

    optimal inflation; zero lower bound;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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