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

Author

Listed:
  • Marc Carreras

  • 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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    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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