English, Article, Journal or magazine article edition: Real implications of the zero bound on nominal interest rates Alexander L. Wolman

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Bookmark: http://trove.nla.gov.au/version/74636
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Real implications of the zero bound on nominal interest rates
Author
  • Alexander L. Wolman
Physical Description
  • preprint
Notes
  • When price-setting is staggered and firms choose prices optimally, low inflation regimes (where the nominal interest rate is occasionally zero) do not entail significant distortions to the real economy. By targeting the price level, the monetary authority can generate temporarily expected inflation when nominal rates are zero, pushing real rates down. In contrast, when firms choose their prices according to the Fuhrer-Moore rule, the zero bound causes real distortions. By targeting the price level instead of inflation, however, the monetary authority can lessen those distortions.
  • RePEc:sce:scecf9:1152
  • If monetary policy succeeds in keeping average inflation very low, nominal interest rates may occasionally be constrained by the zero lower bound. The degree to which this constraint has real implications depends on the monetary policy feedback rule and the structure of price-setting. Policy rules that make the price level stationary lead to small real distortions from the zero bound. If policy imparts persistence into the inflation rate, the real implications of the zero bound are large in the presence of backward looking price-setting, and small if prices are set to maximize profits.
  • Monetary policy ; Interest rates ; Price levels
  • RePEc:fip:fedrwp:03-15
Language
  • English
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