NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates

Bennett T. McCallum

NBER Working Paper No. 7677
Issued in April 2000
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic stabilizing properties of Taylor rules in a ZLB context. The most important argument, however, is that if the short nominal rate is immobilized at zero, there nevertheless exists a route for monetary stabilization policy to be effective--- via the foreign exchange market. Its quantitative importance is examined in a calibrated, optimizing, open-economy model.

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Document Object Identifier (DOI): 10.3386/w7677

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