Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates

   (168 K)

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.

Published:

• Proceedings, Federal Reserve Bank of Boston, (2000) pp. 870-935 ,
• Journal of Money, Credit and Banking, Vol. 32, no. 4, part 2 (November 2000): 870-904

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