The Zero Lower Bound on the Interest Rate and a Neo-Classical Phillips Curve

33 Pages Posted: 9 Sep 2010

Date Written: July 1, 2010

Abstract

With sticky prices, optimizing agents and money in the utility function, I derive the exact analytical solution for optimal monetary policy given a zero lower bound (ZLB) on the interest rate. The Phillips curve is Neo-Classical, and the ZLB is then not a constraint on optimal policy. Optimal policy is history dependent even without a commitment problem and implements a Friedman rule equilibrium. The role of forward guidance in policy is more limited than under a New-Keynesian Phillips curve. The optimal policy rule intercept term is time varying and depends on the variance of the natural real rate.

Keywords: Zero Lower Bound on Interest Rates, Monetary Policy

JEL Classification: E31, E52, E61

Suggested Citation

Alstadheim, Ragna, The Zero Lower Bound on the Interest Rate and a Neo-Classical Phillips Curve (July 1, 2010). Norges Bank Working Paper 2010/13, Available at SSRN: https://ssrn.com/abstract=1673779

Ragna Alstadheim (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

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