Optimal monetary policy with r*<0

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• dc.contributor.author Billi, Roberto
• dc.contributor.author Galí, Jordi, 1961-
• dc.contributor.author Nakov, Anton
• dc.date.accessioned 2024-03-04T11:04:45Z
• dc.date.available 2024-03-04T11:04:45Z
• dc.date.issued 2024
• dc.date.updated 2024-03-04T11:04:44Z
• dc.description Includes supplementary materials for the online appendix.
• dc.description.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.
• dc.description.sponsorship Financial support from the European Research Council under the European Union's Horizon 2020 research and innovation program (Grant 882332-HEMPEF), from the Agencia Estatal de Investigación (AEI), Spain, through the Severo Ochoa Program for Centres of Excellence in R&D (Barcelona School of Economics CEX2019-000915-S) and from the Generalitat de Catalunya, Spain, through the CERCA Program.
• dc.format.mimetype application/pdf
• dc.identifier.citation Billi R, Galí J, Nakov A. Optimal monetary policy with r*<0. J Monet Econ. 2024 Mar;142:103518. DOI: 10.1016/j.jmoneco.2023.09.005
• dc.identifier.doi http://dx.doi.org/10.1016/j.jmoneco.2023.09.005
• dc.identifier.issn 0304-3932
• dc.identifier.uri http://hdl.handle.net/10230/59313
• dc.language.iso eng
• dc.publisher Elsevier
• dc.relation.ispartof Journal of monetary economics. 2023 Mar;142:103518
• dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/882332
• dc.relation.projectID info:eu-repo/grantAgreement/ES/2PE/CEX2019-000915-S
• dc.rights © 2023 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/4.0/
• dc.subject.keyword Zero lower bound
• dc.subject.keyword New Keynesian model
• dc.subject.keyword Decline in r*
• dc.subject.keyword Equilibrium determinacy
• dc.subject.keyword Regime switching models
• dc.subject.keyword Secular stagnation
• dc.title Optimal monetary policy with r*<0
• dc.type info:eu-repo/semantics/article
• dc.type.version info:eu-repo/semantics/publishedVersion