Optimal Monetary Policy with r*<0 / Roberto M. Billi, Jordi Galí, Anton Nakov.

Format:

Book

Author/Creator:

Billi, Roberto M.

Contributor:

National Bureau of Economic Research.

Galí, Jordi.

Nakov, Anton.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31508.

NBER working paper series no. w31508

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

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.

Notes:

Print version record

July 2023.