Optimal Inflation Target in an Economy with Menu Costs and a Zero Lower Bound

2021 ◽  
Vol 13 (3) ◽  
pp. 108-141
Author(s):  
Andrés Blanco
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Empirical Distribution ◽  
Cost Model ◽  
Zero Lower Bound ◽  
Menu Costs ◽  
Inflation Target ◽  
Firm Level ◽  
Resource Misallocation ◽  
Model Features

I study the optimal inflation target in a quantitative menu cost model with a zero lower bound on interest rates. I find that the optimal inflation target is 3.5 percent, which is higher than in models commonly used for monetary policy analysis. Key to this result is that inflation has a small effect on resource misallocation when the model features firm-level shocks, which are necessary to match the empirical distribution of price changes. A higher inflation target decreases price flexibility at the zero lower bound, and through this mechanism, it reduces the severity of recessions when the monetary authority is constrained. (JEL E12, E31, E32, E42, E52)

scholarly journals Inflation Target and its Impact on Macroeconomy in the Zero Lower Bound Environment: the case of the Czech economy

2016 ◽  
Vol 16 (1) ◽  
pp. 3-16 ◽  
Author(s):  
Miroslav Hloušek
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Stochastic Simulation ◽  
Zero Lower Bound ◽  
Dsge Model ◽  
Inflation Target ◽  
Target Setting ◽  
Target Values ◽  
Inflation Targets

Abstract This paper uses a stochastic simulation of a DSGE model of the Czech economy to study the macroeconomic consequences of inflation target setting when interest rates are constrained by the zero lower bound. The distortions of this constraint depend non-linearly on the inflation target. For an inflation target of two percent the costs are negligible, but they increase steeply with lower target values. The largest impact is on the average values of output, consumption and investment; inflation is only slightly influenced. The volatility of all the variables considered increases significantly, but only for inflation targets that are close to zero. An inflation target of four percent does not bring additional benefits either in terms of lower volatility or in terms of higher average values.

scholarly journals Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates

2014 ◽  
Vol 104 (10) ◽  
pp. 3154-3185 ◽  
Author(s):  
Eric T. Swanson ◽  
John C. Williams
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Lower Bound ◽  
Private Sector ◽  
Interest Rates ◽  
Zero Lower Bound ◽  
Short Term ◽  
Macroeconomic Models ◽  
Monetary And Fiscal Policy ◽  
Effectiveness Of Monetary Policy

According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current short-term rate. Put differently, longer-term yields matter. We show how to measure the zero bound's effects on yields of any maturity. Indeed, 1- and 2-year Treasury yields were surprisingly unconstrained throughout 2008 to 2010, suggesting that monetary and fiscal policy were about as effective as usual during this period. Only beginning in late 2011 did these yields become more constrained. (JEL E43, E52, E62)

scholarly journals Optimal institutional design when there is a zero lower bound on interest rates

2011 ◽  
Vol 63 (4) ◽  
pp. 700-721 ◽  
Author(s):  
Sanjit Dhami ◽  
Ali al-Nowaihi
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Institutional Design ◽  
Zero Lower Bound

scholarly journals REAL RIGIDITIES AND OPTIMAL STABILIZATION AT THE ZERO LOWER BOUND IN NEW KEYNESIAN ECONOMIES

2017 ◽  
Vol 23 (4) ◽  
pp. 1371-1400 ◽  
Author(s):  
Adiya Belgibayeva ◽  
Michal Horvath
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Optimal Policy ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Wage Setting ◽  
Optimal Stabilization ◽  
Labor Market Segmentation ◽  
Policy Responses ◽  
New Keynesian Models

The paper revisits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labor market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

scholarly journals Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates

2013 ◽  
pp. 01-43 ◽  
Author(s):  
Eric T. Swanson ◽  
◽  
John C. Williams ◽  
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Zero Lower Bound

The Zero-Lower Bound on Interest Rates: Myth or Reality?

2013 ◽  
Author(s):  
Robert A. Jarrow
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Zero Lower Bound
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