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Optimal rules for central bank interest rates subject to zero lower bound

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The celebrated Taylor rule provides a simple formula that aims to capture how the central bank interest rate is adjusted as a linear function of inflation and output gap. However, the rule does not take explicitly into account the zero lower bound on the interest rate. Prior studies on interest rate selection subject to the zero lower bound have not produced rigorous derivations of explicit rules. In this work, Taylor-like rules for central bank interest rates bounded below by zero are derived rigorously using a multi-parametric model predictive control (mpMPC) framework. Rules with or without inertia are included in the derivation. The proposed approach is illustrated through simulations on US economy data. A number of issues for future study are proposed.

Language: Englisch

Bibliographic citation: Series: Economics Discussion Papers ; No. 2013-49

Classification: Wirtschaft
Monetary Policy
Optimization Techniques; Programming Models; Dynamic Analysis

Subject: Taylor rule
zero lower bound
liquidity trap
model predictive control
multiparametric programming

Event: Geistige Schöpfung

(who): Singh, Ajay Pratap
Nikolaou, Michael

Event: Veröffentlichung

(who): Kiel Institute for the World Economy (IfW)

(where): Kiel

(when): 2013

Handle: http://hdl.handle.net/10419/82648

Last update: 10.03.2025, 11:41 AM CET

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Object type

Arbeitspapier

Associated

Singh, Ajay Pratap
Nikolaou, Michael
Kiel Institute for the World Economy (IfW)

Time of origin

2013

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