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The optimal inflation buffer with a zero bound on nominal interest rates

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This paper characterizes the optimal inflation buffer consistent with a zero lower bound on nominal interest rates in a New Keynesian sticky-price model. It is shown that a purely forward-looking version of the model that abstracts from inflation inertia would significantly underestimate the inflation buffer. If the central bank follows the prescriptions of a welfaretheoretic objective, a larger buffer appears optimal than would be the case employing a traditional loss function. Taking also into account potential downward nominal rigidities in the price-setting behavior of firms appears not to impose significant further distortions on the economy.

Language: Englisch

Bibliographic citation: Series: CFS Working Paper ; No. 2005/17

Classification: Wirtschaft
Computational Techniques; Simulation Modeling
Price Level; Inflation; Deflation
Monetary Policy

Subject: Inflation Inertia
Downward Nominal Rigidity
Nonlinear Policy
Liquidity Trap

Event: Geistige Schöpfung

(who): Billi, Roberto M.

Event: Veröffentlichung

(who): Goethe University Frankfurt, Center for Financial Studies (CFS)

(where): Frankfurt a. M.

(when): 2004

Handle: http://hdl.handle.net/10419/25420

URN: urn:nbn:de:hebis:30-10932

Last update: 10.03.2025, 11:42 AM CET

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Object type

Arbeitspapier

Associated

Billi, Roberto M.
Goethe University Frankfurt, Center for Financial Studies (CFS)

Time of origin

2004

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