The Stochastic Lower Bound

12 Pages Posted: 29 Aug 2018

Date Written: August 24, 2018

Abstract

Since the Great Recession policy rates have been extremely low, but neither absolutely constant, nor exactly set to zero. We thus augment a standard zero lower bound model to study the effects of a stochastic lower bound (SLB) on policy rates. We find that a less predictable SLB helps keep inflation closer to target by lowering expectations of future values of the SLB when interest rate cuts are not an option.

Keywords: Zero lower bound, DSGE

JEL Classification: E31, E52

Suggested Citation

Masolo, Riccardo and Winant, Pablo E., The Stochastic Lower Bound (August 24, 2018). Bank of England Working Paper No. 754, Available at SSRN: https://ssrn.com/abstract=3240496 or http://dx.doi.org/10.2139/ssrn.3240496

Riccardo Masolo (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Pablo E. Winant

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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