Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation
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.
Forthcoming in Annual Review of Economics, doi: 10.1146/annurev-economics-080315-015306. We are grateful to seminar participants at Berkeley and IMF for comments on an earlier version of the paper. Yuriy Gorodnichenko thanks the NSF and Sloan Foundation for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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).