Monetary Policy When Interest Rates are Bounded at Zero
The Review of Economics and Statistics, Vol. LXXIX, No. 4 (November 1997)
Posted: 23 Mar 1998
This paper assesses the importance of the zero lower bound on nominal interest rates for the interest-rate channel of monetary policy. We simulate several interest-rate setting policy rules with either high or low inflation targets. We determine the extent to which the zero bound prevents real rates from falling, thus cushioning aggregate output in response to negative spending shocks. For small temporary and large permanent shocks, the output path with zero inflation lies modestly below that for higher inflation. For large shocks persisting a few quarters, differences in output paths across high- and low- inflation scenarios can be larger.
JEL Classification: E42, E52, E58
Suggested Citation: Suggested Citation