Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/299293 
Year of Publication: 
2024
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 433
Publisher: 
Sveriges Riksbank, Stockholm
Abstract: 
We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, when the steady state natural rate (r*) becomes permanently negative. We show that the optimal policy aims to approach gradually a new steady state with positive average inflation. Around that steady state, the optimal policy implies well defined (second-best) paths for inflation and output in response to shocks to the natural rate. Under plausible calibrations, the optimal policy implies that the nominal rate remains at its ZLB most of the time. Despite the latter feature, the central bank can implement the optimal outcome as a unique equilibrium by means of an appropriate nonlinear interest rate rule. In order to establish that result, we derive sufficient conditions for local determinacy in a general model with endogenous regime switches.
Subjects: 
zero lower bound
New Keynesian model
decline in r*
equilibrium determinacy
regime switching models
secular stagnation
JEL: 
E32
E52
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.