Inflation, Debt and the Zero Lower Bound

16 Pages Posted: 25 Mar 2015

Date Written: October 23, 2014

Abstract

This paper analyses the macroeconomic effects of a protracted period of low and falling inflation rates when monetary policy is constrained by the zero lower bound (ZLB) on nominal interest rates and the private sector is indebted in nominal terms (debt-deflation channel). In this scenario, even cost-push shocks that in normal circumstances would reduce inflation and stimulate output are found to have contractionary effects on economic activity, especially when the interplay of ZLB and debt deflation is considered.

Keywords: zero lower bound, monetary policy, disinflation, debt-deflation channel

JEL Classification: E21, E31, E37, E52

Suggested Citation

Neri, Stefano and Notarpietro, Alessandro, Inflation, Debt and the Zero Lower Bound (October 23, 2014). Bank of Italy Occasional Paper No. 242. Available at SSRN: https://ssrn.com/abstract=2584492 or http://dx.doi.org/10.2139/ssrn.2584492

Stefano Neri (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy
+39 06 4792 2821 (Phone)

Alessandro Notarpietro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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