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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
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CEF99, Boston College, Department of Economics, Chestnut Hill MA 02467 USA

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Web page: http://fmwww.bc.edu/CEF99/

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