Department of Economics
University of California at Berkeley
Berkeley, CA 94720-3880
Institutional Affiliation: University of California at Berkeley
NBER Working Papers and Publications
|August 2016||Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation|
with , , : w22510
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.
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).