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The zero lower bound on the interest rate and a Neo-Classical Phillips curve

  • Ragna Alstadheim


    (Norges Bank (Central Bank of Norway))

With sticky prices, optimizing agents and money in the utility function, I derive the exact analytical solution for optimal monetary policy given a zero lower bound (ZLB) on the interest rate. The Phillips curve is Neo-Classical, and the ZLB is then not a constraint on optimal policy. Optimal policy is history dependent even without a commitment problem and implements a Friedman rule equilibrium. The role of forward guidance in policy is more limited than under a New-Keynesian Phillips curve. The optimal policy rule intercept term is time varying and depends on the variance of the natural real rate.

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Paper provided by Norges Bank in its series Working Paper with number 2010/13.

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Length: 33 pages
Date of creation: 01 Jul 2010
Date of revision:
Handle: RePEc:bno:worpap:2010_13
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