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Note on zero lower bound worries


  • Cees Ullersma
  • Gerben Hieminga


Although some authors have suggested that monetary expansion is still possible when the monetary policy interest rate cannot be reduced further, central banks tend to avoid interest rates close to the zero lower bound. Taking into account central banks.aversion to very low interest rates, we investigate optimal monetary policy in a New-Keynesian macro-economic model. Our analysis shows that appointing a central banker with a high aversion to low interest rate levels can mitigate the zero bound risk at the cost of persistent in.ation deviations from target. If fear of the zero lower bound is unfounded, it is better to appoint a central banker with no aversion to the zero lower bound, who will not shy away from unorthodox policies when the policy interest rate cannot be reduced further.

Suggested Citation

  • Cees Ullersma & Gerben Hieminga, 2006. "Note on zero lower bound worries," DNB Working Papers 117, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:117

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    References listed on IDEAS

    1. Gauti B. Eggertsson, 2003. "How to Fight Deflation in a Liquidity Trap; Committing to Being Irresponsible," IMF Working Papers 03/64, International Monetary Fund.
    2. Svensson, Lars-E-O, 2001. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 277-312, February.
    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    4. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
    5. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
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    More about this item


    zero lower bound; inflation bias.;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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