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

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Listed:
  • Marc Dordal-i-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. We introduce a regime switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. We discuss what different calibrations of this model imply for optimal inflation rates.

Suggested Citation

  • Marc Dordal-i-Carreras & Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2016. "Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation," NBER Working Papers 22510, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22510
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    References listed on IDEAS

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    Cited by:

    1. Keshav Dogra & Sushant Acharya, 2017. "The Side Effects of Safe Asset Creation," 2017 Meeting Papers 1453, Society for Economic Dynamics.
    2. Miyamoto, Wataru & Nguyen, Thuy Lan & Sergeyev, Dmitriy, 2016. "Government Spending Multipliers under the Zero Lower Bound: Evidence from Japan," CEPR Discussion Papers 11633, C.E.P.R. Discussion Papers.
    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.
    4. Atanas Pekanov, 2018. "The New View on Fiscal Policy and its Implications for the European Monetary Union," WIFO Working Papers 562, WIFO.
    5. Lansing, Kevin J., 2017. "Endogenous Regime Switching Near the Zero Lower Bound," Working Paper Series 2017-24, Federal Reserve Bank of San Francisco.
    6. repec:aea:aejmac:v:10:y:2018:i:3:p:247-77 is not listed on IDEAS
    7. repec:eee:ecmode:v:68:y:2018:i:c:p:484-505 is not listed on IDEAS

    More about this item

    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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