TY  - JOUR
AU  - Laxton,Douglas
AU  - N'Diaye,Papa
AU  - Pesenti,Paolo
TI  - Deflationary Shocks and Monetary Rules: an Open-Economy Scenario Analysis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12703
PY  - 2006
Y2  - November 2006
UR  - http://www.nber.org/papers/w12703
L1  - http://www.nber.org/papers/w12703.pdf
N1  - Author contact info:
Douglas Laxton
International Monetary Fund
700 19th Street
Washington, DC  20431
E-Mail: dlaxton@imf.org

Papa NDiaye
International Monetary Fund
700 19th Street
Washington, DC  20431
E-Mail: pndiaye@imf.org

Paolo A. Pesenti
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
Tel: 212/720-5493
Fax: 212/720-6831
E-Mail: paolo.pesenti@ny.frb.org
M3  - presented at "TRIO Conference", December 9-10, 2005
AB  - The paper considers the macroeconomic transmission of demand and supply shocks in an open economy under alternative assumptions on whether the zero interest floor (ZIF) is binding. It uses a two-country general-equilibrium simulation model calibrated to the Japanese economy vis-a-vis the rest of the world. Negative demand shocks have more prolonged and startling effects on the economy when the ZIF is binding than when it is not binding. Positive supply shocks can actually extend the period of time over which the ZIF may be expected to bind. More open economies hit the ZIF for a shorter period of time, and with less harmful effects. Deflationary supply shocks have different implications according to whether they are concentrated in the tradables rather than the nontradables sector. Price-level-path targeting rules are likely to provide better guidelines for monetary policy in a deflationary environment, and have desirable properties in normal times when the ZIF is not binding.
ER  -