Discretionary Monetary Policy and the Zero Lower Bound on Nominal Interest Rates (2007)

Content Provider	CiteSeerX
Author	Adam, Klaus Billi, Roberto M.
Abstract	Abstract: Ignoring the existence of the zero bound on nominal interest rates one considerably understates the value of monetary commitment in New Keynesian models. A stochastic forward-looking model with an occasionally binding lower bound, calibrated to the U.S. economy, suggests that low values for the natural rate of interest lead to sizeable output losses and deflation under discretionary monetary policy. The fall in output and deflation are much larger than in the case with policy commitment and do not show up at all if the model abstracts from the existence of the lower bound. The welfare losses of discretionary policy increase even further when inflation is partly determined by lagged inflation in the Phillips curve. These results emerge because private sector expectations and the discretionary policy response to these expectations reinforce each other and cause the lower bound to be reached much earlier than under commitment.
File Format	PDF
Journal	Journal of Monetary Economics. Forthcoming
Language	English
Publisher Date	2007-01-01
Access Restriction	Open
Subject Keyword	Discretionary Monetary Policy Nominal Interest Rate Zero Lower Bound Zero Bound Stochastic Forward-looking Model New Keynesian Model Lagged Inflation Natural Rate Sizeable Output Loss Phillips Curve Interest Lead U.s. Economy Policy Commitment Discretionary Policy Response Welfare Loss Discretionary Policy Increase Low Value Monetary Commitment Private Sector Expectation
Content Type	Text
Resource Type	Article