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Monetary Policy When Interest Rates Are Bounded At Zero

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  • Jeffrey C. Fuhrer
  • Brian F. Madigan

Abstract

This paper assesses the importance of the zero lower bound on nominal interest rates for the interest-rate channel of monetary policy. We simulate several interest-rate setting policy rules with either high or low inflation targets. We determine the extent to which the zero bound prevents real rates from falling, thus cushioning aggregate output in response to negative spending shocks. For small temporary and large permanent shocks, the output path with zero inflation lies modestly below that for higher inflation. For large shocks persisting a few quarters, differences in output paths across high- and low-inflation scenarios can be larger. © 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • Jeffrey C. Fuhrer & Brian F. Madigan, 1997. "Monetary Policy When Interest Rates Are Bounded At Zero," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 573-585, November.
  • Handle: RePEc:tpr:restat:v:79:y:1997:i:4:p:573-585
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    1. David E. Lebow, 1993. "Monetary policy at near-zero interest rates," Working Paper Series / Economic Activity Section 136, Board of Governors of the Federal Reserve System (U.S.).
    2. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    3. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252.
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