Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates
56 Pages Posted: 21 May 2000 Last revised: 17 Oct 2010
Date Written: April 2000
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.
Suggested Citation: Suggested Citation