Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation
Published By: NATIONAL BUREAU OF ECONOMIC RESEARCH on eSS | Published Date: August , 2016Countries rarely hit the zero-lower bound on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to jointly incorporate into macroeconomic models using typical representations of shock processes. This paper introduces a regime switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. It discusses what different calibrations of this model imply for optimal inflation rates. [Working Paper 22510]
Author(s): Marc Carreras, Olivier Coibion, Yuriy Gorodnichenko, Johannes Wieland | Posted on: Aug 16, 2016 | Views()