The Stochastic Lower Bound
12 Pages Posted: 29 Aug 2018
Date Written: August 24, 2018
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: Suggested Citation