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Low real interest rates and the zero lower bound

Author

Listed:
  • Stephen Williamson

    (University of Western Ontario)

Abstract

How do low real interest rates constrain monetary policy? Is the zero lower bound optimal if the real interest rate is sufficiently low? What is the role of forward guidance? A model is constructed that incorporates sticky price frictions, collateral constraints, and conventional monetary distortions. The model has neo-Fisherian properties. If the zero lower bound is a problem, then a symptom is inflation above the central bank's inflation target. Extended periods of low nominal interest rates are useful in bringing inflation down and relaxing financial constraints, not for forward guidance reasons. The ZLB may be suboptimal under tight collateral constraints. (Copyright: Elsevier)

Suggested Citation

  • Stephen Williamson, 2019. "Low real interest rates and the zero lower bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 36-62, January.
  • Handle: RePEc:red:issued:18-12
    DOI: 10.1016/j.red.2018.12.003
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    References listed on IDEAS

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    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
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    7. Andolfatto, David & Williamson, Stephen, 2015. "Scarcity of safe assets, inflation, and the policy trap," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 70-92.
    8. Peter Rupert & Roman Šustek, 2016. "On the Mechanics of New-Keynesian Models," Working Papers 784, Queen Mary University of London, School of Economics and Finance.
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    Cited by:

    1. Athanasios Geromichalos & Lucas Herrenbrueck, 2017. "The Liquidity-Augmented Model of Macroeconomic Aggregates," Discussion Papers dp17-16, Department of Economics, Simon Fraser University.
    2. repec:eee:dyncon:v:89:y:2018:i:c:p:154-172 is not listed on IDEAS

    More about this item

    JEL classification:

    • 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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