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Real Implications of the Zero Bound on Nominal Interest Rates

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  • Alexander L. Wolman

    (Federal Reserve Bank of Richmond)

Abstract

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.

Suggested Citation

  • Alexander L. Wolman, 1999. "Real Implications of the Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 1999 1152, Society for Computational Economics.
  • Handle: RePEc:sce:scecf9:1152
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