Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates

56 Pages Posted: 21 May 2000 Last revised: 17 Oct 2010

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Date Written: April 2000

Abstract

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

McCallum, Bennett T., Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates (April 2000). NBER Working Paper No. w7677, Available at SSRN: https://ssrn.com/abstract=228151

Bennett T. McCallum (Contact Author)

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