Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates

This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic stabilizing...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2000-11, Vol.32 (4), p.870-904
Main Author: McCallum, Bennett T.
Format: Article
Language:English
Subjects:
Bank credit
Central banks
Credit
Economic models
Inflation rates
Interest rates
Macroeconomic modeling
Modeling
Monetary policy
Nominal interest rates
Steady state economies
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Summary:This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic stabilizing properties of Taylor rules in a ZLB context. The most important argument, however, is that if the short nominal rate is immobilized at zero, there nevertheless exists a route for monetary stabilization policy to be effective-via the foreign exchange market. Its quantitative importance is examined in a calibrated, optimizing, open-economy model.
ISSN:0022-2879
1538-4616
DOI:10.2307/2601148