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

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  • Marc Carreras

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  • Olivier Coibion

    ()

  • Yuriy Gorodnichenko

    ()

  • Johannes Wieland

    ()

Abstract

Countries rarely hit the zero-lower bound on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to jointly incorporate into macroeconomic models using typical representations of shock processes. This paper introduces a regime switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. It discusses what different calibrations of this model imply for optimal inflation rates. [Working Paper 22510]

Suggested Citation

  • Marc Carreras & Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2016. "Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation," Working Papers id:11216, eSocialSciences.
  • Handle: RePEc:ess:wpaper:id:11216
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    References listed on IDEAS

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    1. Pierpaolo Benigno & Michael Woodford, 2005. "Inflation Stabilization And Welfare: The Case Of A Distorted Steady State," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1185-1236, December.
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    5. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 47-82, February.
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    13. Abo-Zaid, Salem, 2015. "Optimal long-run inflation with occasionally binding financial constraints," European Economic Review, Elsevier, vol. 75(C), pages 18-42.
    14. David L. Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    15. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-966, November.
    16. Roberto M. Billi, 2011. "Optimal Inflation for the US Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 29-52, July.
    17. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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    Citations

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    Cited by:

    1. Lansing, Kevin J., 2017. "Endogenous Regime Switching Near the Zero Lower Bound," Working Paper Series 2017-24, Federal Reserve Bank of San Francisco.
    2. Davide Debortoli & Jordi Galí & Luca Gambetti, 2019. "On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint," NBER Chapters,in: NBER Macroeconomics Annual 2019, volume 34 National Bureau of Economic Research, Inc.
    3. Philippe Andrade & Jordi Galí & Hervé Le Bihan & Julien Matheron, 2017. "The optimal inflation target and the natural rate of interest," Economics Working Papers 1591, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2019.
    4. Szabolcs Deák & Paul Levine & Afrasiab Mirza & Joseph Pearlman, 2019. "Designing Robust Monetary Policy Using Prediction Pools," School of Economics Discussion Papers 1219, School of Economics, University of Surrey.
    5. Keshav Dogra & Sushant Acharya, 2017. "The Side Effects of Safe Asset Creation," 2017 Meeting Papers 1453, Society for Economic Dynamics.
    6. Wataru Miyamoto & Thuy Lan Nguyen & Dmitriy Sergeyev, 2018. "Government Spending Multipliers under the Zero Lower Bound: Evidence from Japan," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(3), pages 247-277, July.
    7. Foerster, Andrew T. & Choi, Jason, 2016. "Optimal monetary policy regime switches," Research Working Paper RWP 16-7, Federal Reserve Bank of Kansas City.
    8. repec:eee:ecmode:v:68:y:2018:i:c:p:484-505 is not listed on IDEAS
    9. Atanas Pekanov, 2018. "The New View on Fiscal Policy and its Implications for the European Monetary Union," WIFO Working Papers 562, WIFO.

    More about this item

    Keywords

    zero-lower bound on interest rates; Optimal Rate of Inflation; macroeconomic models; New Keynesian model; realistic distribution of ZLB durations;

    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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