NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Marc Dordal-i-Carreras, Olivier Coibion, Yuriy Gorodnichenko, Johannes Wieland

NBER Working Paper No. 22510
Issued in August 2016
NBER Program(s):EFG, ME

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.

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Document Object Identifier (DOI): 10.3386/w22510

Published: Marc Dordal i Carreras & Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2016. "Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation," Annual Review of Economics, vol 8(1).

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