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

See all articles by Jeffrey C. Fuhrer

Jeffrey C. Fuhrer

Federal Reserve Bank of Boston; Harvard University - Harvard Kennedy School (HKS)

Brian F. Madigan

affiliation not provided to SSRN

Abstract

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

Fuhrer, Jeffrey C. and Madigan, Brian F., Monetary Policy When Interest Rates are Bounded at Zero. The Review of Economics and Statistics, Vol. LXXIX, No. 4 (November 1997), Available at SSRN: https://ssrn.com/abstract=61415

Jeffrey C. Fuhrer (Contact Author)

Federal Reserve Bank of Boston ( email )

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Harvard University - Harvard Kennedy School (HKS) ( email )

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United States

Brian F. Madigan

affiliation not provided to SSRN

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