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Real Implications of the Zero Bound on Nominal Interest Rates

  • Alexander L. Wolman

    ()

    (Federal Reserve Bank of Richmond)

When price-setting is staggered and firms choose prices optimally, low inflation regimes (where the nominal interest rate is occasionally zero) do not entail significant distortions to the real economy. By targeting the price level, the monetary authority can generate temporarily expected inflation when nominal rates are zero, pushing real rates down. In contrast, when firms choose their prices according to the Fuhrer-Moore rule, the zero bound causes real distortions. By targeting the price level instead of inflation, however, the monetary authority can lessen those distortions.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 1999 with number 1152.

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Date of creation: 01 Mar 1999
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Handle: RePEc:sce:scecf9:1152
Contact details of provider: Postal: CEF99, Boston College, Department of Economics, Chestnut Hill MA 02467 USA
Fax: +1-617-552-2308
Web page: http://fmwww.bc.edu/CEF99/

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  1. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc.
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  8. Harald Uhlig, 2000. "Should we be afraid of Friedman's rule?," Macroeconomics 0004016, EconWPA.
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  11. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 825-860, October.
  12. Bennett McCallum, 2001. "Inflation targeting and the liquidity trap," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  13. Jeffrey C. Fuhrer & Brian F. Madigan, 1997. "Monetary Policy When Interest Rates Are Bounded At Zero," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 573-585, November.
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  25. Alexander L. Wolman, 1998. "Staggered price setting and the zero bound on nominal interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-24.
  26. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
  27. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  28. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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  31. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
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