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Paper #1830

Optimal Monetary Policy with r* < 0
Roberto M. Billi, Jordi GalĂ­ i Anton Nakov
Març 2022
We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, and in which the steady state natural rate (r*) is negative. We show that the optimal policy aims to approach gradually a steady state with positive average inflation. Around that steady state, inflation and output fluctuate optimally in response to shocks to the natural rate. The central bank can implement that optimal outcome by means of an appropriate state-contingent rule, even though in equilibrium the nominal rate remains at zero most (or all) of the time. In order to establish that result, we derive sufficient conditions for local determinacy in a more general model with endogenous regime switches.
Paraules clau:
zero lower bound, New Keynesian model, decline in r*, equilibrium determinacy, regime switching models, secular stagnation
Codis JEL:
E32, E52
Àrea de Recerca:
Macroeconomia i Economia Internacional
Publicat a:
Journal of Monetary Economics 142 (2024) 103518

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