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Articles de revues sur le sujet « Zero interest rate lower bound »

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Publié le 10 mars 2023

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1

Klose, Jens. "Exchange rate movements in the presence of the zero lower bound." Banks and Bank Systems 12, no. 1 (2017): 82–87. http://dx.doi.org/10.21511/bbs.12(1).2017.10.

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Exchange rates are expected to adjust according to the stance of monetary policies, which are in normal times differences in interest rates set by the central banks. This interest rate parity does, however, no longer hold if central banks approach the zero lower bound on interest rates and switch to measures of quantitative easing. Therefore, the author estimates exchange rate changes based on the different stance of the monetary base, which is an indicator of differing monetary policies in the countries. The results reveal that indeed exchange rates movements in the Dollar-Euro-Rate can be explained by differences in the monetary base, since the zero lower bound has become binding. However, the influence depends crucially on whether the monetary base is increased or decreased and whether the other central bank is also expanding or reducing its balance sheet at the same time. Keywords: monetary base, exchange rate, Fed, ECB. JEL Classification: E52, E58, F42

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Lee, Sang Seok. "INFORMATION VALUE OF THE INTEREST RATE AND THE ZERO LOWER BOUND." Macroeconomic Dynamics 24, no. 7 (2019): 1758–84. http://dx.doi.org/10.1017/s1365100518001037.

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Why is a zero lower bound episode long-lasting and disruptive? This paper proposes the interruption of information flow from the central bank’s interest rate decision to the private sector as a channel by which the destabilizing effect of the zero lower bound constraint on the nominal interest rate is amplified. This mechanism is incorporated into the new Keynesian model by modifying its information structure. This paper shows that the information loss at the zero lower bound can increase (a) the duration of the zero lower bound episodes and (b) the size of deflation and output gap loss. The result in this paper demonstrates that enhanced information sharing by the central bank about the state of the economy can be effective at alleviating the cost of the zero lower bound.

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Amador, Manuel, Javier Bianchi, Luigi Bocola, and Fabrizio Perri. "Exchange Rate Policies at the Zero Lower Bound." Review of Economic Studies 87, no. 4 (2019): 1605–45. http://dx.doi.org/10.1093/restud/rdz059.

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Abstract We study the problem of a monetary authority pursuing an exchange rate policy that is inconsistent with interest rate parity because of a binding zero lower bound constraint. The resulting violation in interest rate parity generates an inflow of capital that the monetary authority needs to absorb by accumulating foreign reserves. We show that these interventions by the monetary authority are costly, and we derive a simple measure of these costs: they are proportional to deviations from the covered interest parity (CIP) condition and the amount of accumulated foreign reserves. Our framework can account for the recent experiences of “safe-haven” currencies and the sign of their observed deviations from CIP.

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Tarelli, Andrea. "No-arbitrage one-factor term structure models in zero- or negative-lower-bound environments." Investment Management and Financial Innovations 17, no. 1 (2020): 197–212. http://dx.doi.org/10.21511/imfi.17(1).2020.18.

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One-factor no-arbitrage term structure models where the instantaneous interest rate follows either the process proposed by Vasicek (1977) or by Cox, Ingersoll, and Ross (1985), commonly known as CIR, are parsimonious and analytically tractable. Models based on the original CIR process have the important characteristic of allowing for a time-varying conditional interest rate volatility but are undefined in negative interest rate environments. A Shifted-CIR no-arbitrage term structure model, where the instantaneous interest rate is given by the sum of a constant lower bound and a non-negative CIR-like process, allows for negative yields and benefits from similar tractability of the original CIR model. Based on the U.S. and German yield curve data, the Vasicek and Shifted-CIR specifications, both considering constant and time-varying risk premia, are compared in terms of information criteria and forecasting ability. Information criteria prefer the Shifted-CIR specification to models based on the Vasicek process. It also provides similar or better in-sample and out-of-sample forecasting ability of future yield curve movements. Introducing a time variation of the interest rate risk premium in no-arbitrage one-factor term structure models is instead not recommended, as it provides worse information criteria and forecasting performance.

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5

Gust, Christopher, Edward Herbst, David López-Salido, and Matthew E. Smith. "The Empirical Implications of the Interest-Rate Lower Bound." American Economic Review 107, no. 7 (2017): 1971–2006. http://dx.doi.org/10.1257/aer.20121437.

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Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the US economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. We find that the interest-rate lower bound was a significant constraint on monetary policy that exacerbated the recession and inhibited the recovery, as our mean estimates imply that the zero lower bound (ZLB) accounted for about 30 percent of the sharp contraction in US GDP that occurred in 2009 and an even larger fraction of the slow recovery that followed. (JEL C11, C32, E12, E23, E32, E43, E52, G01)

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6

Mavroeidis, Sophocles. "Identification at the Zero Lower Bound." Econometrica 89, no. 6 (2021): 2855–85. http://dx.doi.org/10.3982/ecta17388.

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I show that the zero lower bound (ZLB) on interest rates can be used to identify the causal effects of monetary policy. Identification depends on the extent to which the ZLB limits the efficacy of monetary policy. I propose a simple way to test the efficacy of unconventional policies, modeled via a “shadow rate.” I apply this method to U.S. monetary policy using a three‐equation structural vector autoregressive model of inflation, unemployment, and the Federal Funds rate. I reject the null hypothesis that unconventional monetary policy has no effect at the ZLB, but find some evidence that it is not as effective as conventional monetary policy.

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7

Gerlach, Stefan, and John Lewis. "Zero lower bound, ECB interest rate policy and the financial crisis." Empirical Economics 46, no. 3 (2013): 865–86. http://dx.doi.org/10.1007/s00181-013-0713-6.

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8

Bodenstein, Martin, James Hebden, and Ricardo Nunes. "Imperfect Credibility and the Zero Lower Bound on the Nominal Interest Rate." International Finance Discussion Paper 2010, no. 1001 (2010): 1–38. http://dx.doi.org/10.17016/ifdp.2010.1001.

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9

Jones, Callum, Mariano Kulish, and James Morley. "A Structural Measure of the Shadow Federal Funds Rate." Finance and Economics Discussion Series 2021, no. 064 (2021): 1–40. http://dx.doi.org/10.17016/feds.2021.064.

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We propose a shadow policy interest rate based on an estimated structural model that accounts for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance and other unconventional policies that extend the expected duration of zero-interest-rate policy are expansionary and decrease the shadow rate. By quantifying these distinct effects, our structural shadow federal funds rate better captures the stance of monetary policy given economic conditions than a shadow rate based only on the term structure of interest rates.

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10

Fischer, Stanley. "Monetary Policy, Financial Stability, and the Zero Lower Bound." American Economic Review 106, no. 5 (2016): 39–42. http://dx.doi.org/10.1257/aer.p20161005.

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Much has happened in the world of central banking in the past decade. In this paper, I focus on three issues associated with the zero lower bound (ZLB) on short-term nominal interest rates and the nexus between monetary policy and financial stability: 1) whether we are moving toward a permanently lower long-run equilibrium real interest rate; 2) what steps can be taken to mitigate the constraints imposed by the ZLB; and 3) whether and how financial stability considerations should be incorporated in the conduct of monetary policy. These important topics deserve the attention of both academic and government professionals.

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Illing, Gerhard. "The Limits of a Negative Interest Rate Policy (NIRP)." Credit and Capital Markets – Kredit und Kapital: Volume 51, Issue 4 51, no. 4 (2018): 561–85. http://dx.doi.org/10.3790/ccm.51.4.561.

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Abstract The paper analyzes the experience with unconventional measures to cope with the Zero Lower Bound. It argues that forward guidance and quantitative easing are the natural extension of optimal monetary policy within the New Keynesian Framework, facing a Lower Bound. Unconventional policy had significant effects on financial variables and contributed to stabilizing the real economy. Negative rates have been successful in pushing the effective lower bound below zero. But given the risk of damaging side effects on financial stability and on central bank independence, these policy tools are likely to be less powerful and shorter-lived compared to standard tools. In view of the long-term decline of the natural rate of interest, raising the inflation target up to 3–4 percent appears to be the most promising way to relax the constraint imposed by the lower bound, providing a resilient buffer for effective stabilization. Zusammenfassung Die Arbeit untersucht die Auswirkungen unkonventioneller Geldpolitik. Sie zeigt, dass Forward Guidance und Quantitative Lockerung als Anwendung optimaler Geldpolitik im Rahmen Neu-Keynesianischer Modelle angesichts einer effektiven Zinsuntergrenze zu verstehen sind. Unkonventionelle Geldpolitik hat erfolgreich zur Stabilisierung von Finanzmärkten und Realwirtschaft beigetragen. Auch wenn sich die Zinsuntergrenze in gewissem Rahmen unter null senken lässt, ist die Wirkung unkonventioneller Maßnahmen – im Vergleich zu Standard-Instrumenten – jedoch kurzlebiger und weniger schlagkräftig, unter Berücksichtigung der Risiken für Finanzmarktstabilität und Zentralbankunabhängigkeit. Angesichts des nachhaltigen Rückgangs des “natürlichen” Realzinses erscheint eine Abhebung des Inflationsziels auf 2–4 % der geeignetste Weg, um einen robusten Mechanismus effektiver Stabilisierung zu erreichen. JEL Classification: E43, E52, E58

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12

Singh, Gurbachan. "Overcoming Zero Lower Bound on Interest Rate without any Inflation or Inflationary Expectations." South Asian Journal of Macroeconomics and Public Finance 3, no. 1 (2014): 1–38. http://dx.doi.org/10.1177/2277978714525308.

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13

Hännikäinen, Jari. "Zero lower bound, unconventional monetary policy and indicator properties of interest rate spreads." Review of Financial Economics 26 (September 2015): 47–54. http://dx.doi.org/10.1016/j.rfe.2015.03.002.

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14

Alstadheim, Ragna. "The zero lower bound on the interest rate and a Neoclassical Phillips curve." Journal of Macroeconomics 47 (March 2016): 116–30. http://dx.doi.org/10.1016/j.jmacro.2015.10.009.

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15

Ercolani, Valerio, and João Valle e Azevedo. "HOW CAN THE GOVERNMENT SPENDING MULTIPLIER BE SMALL AT THE ZERO LOWER BOUND?" Macroeconomic Dynamics 23, no. 8 (2018): 3457–82. http://dx.doi.org/10.1017/s1365100517001079.

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Some recent empirical evidence questions the typically large size of government spending multipliers when the nominal interest rate is stuck at zero, finding output multipliers of around 1 or even lower, with an upper bound of around 1.5 in some circumstances. In this paper, we use a recent estimate of the degree of substitutability between private and government consumption in an otherwise standard New Keynesian model to show that this channel significantly reduces the size of government spending multipliers obtained when the nominal interest rate is at zero. All else being equal, the relationship of substitutability makes a government spending shock crowd out private consumption while being less inflationary, thus, limiting the typically expansionary effect of the fall in the real interest rate. Subject to the nominal interest rate being constrained at zero, the model generates output multipliers ranging from 0.8 to 1.6.

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16

Flotho, Stefanie. "FISCAL MULTIPLIERS IN A MONETARY UNION UNDER THE ZERO–LOWER–BOUND CONSTRAINT." Macroeconomic Dynamics 19, no. 6 (2014): 1171–94. http://dx.doi.org/10.1017/s1365100513000783.

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This paper analyzes government spending multipliers in a two-country model of a monetary union with price stickiness and home bias in consumption where monetary policy is constrained by the zero lower bound (ZLB) on the nominal interest rate. Government spending multipliers under this constraint are computed and compared with fiscal multipliers in normal times, that is, where the central bank sets the nominal interest rate via a Taylor rule. The trade elasticity and the parameter measuring home bias in consumption play an important role in determining the size of the multiplier. The multipliers are not necessarily large under the ZLB constraint. However, compared with the fiscal multipliers when the central bank sets the nominal interest rate according to a Taylor rule, the multipliers under the ZLB are bigger. Moreover, the persistence parameter of the binding ZLB plays a crucial role.

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17

Chen, W. D. "Liquidity, covered interest rate parity, and zero lower bound in Japan’s foreign exchange markets." International Review of Economics & Finance 69 (September 2020): 334–49. http://dx.doi.org/10.1016/j.iref.2020.05.007.

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18

Rösl, Seitz, and Tödter. "The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis." Economies 7, no. 3 (2019): 67. http://dx.doi.org/10.3390/economies7030067.

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To broaden the operational scope of monetary policy, several authors suggest cash abolition as an appropriate means of breaking through the zero lower-bound. We argue that the welfare costs of bypassing the zero lower-bound by getting rid of cash entirely are analytically equivalent to negative interest rates on cash holdings. Using a money-in-the-utility-function model, we measure in two ways the welfare loss consumers as money holders would be forced to bear once the zero lower-bound is broken: in terms of the amount needed to compensate consumers (compensated variation), and as excess burden (deadweight loss) imposed on the economy as a whole. We calibrated the model for the euro area and for Germany. Our findings suggest that the welfare losses of negative interest rates incurred by consumers as holders of cash and transaction balances (M3) are large and enduring, notably if implemented in the current low-interest rate environment.

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19

Woodford, Michael, and Yinxi Xie. "Policy Options at the Zero Lower Bound When Foresight is Limited." AEA Papers and Proceedings 109 (May 1, 2019): 433–37. http://dx.doi.org/10.1257/pandp.20191084.

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We reconsider several monetary and fiscal policies that have been proposed as tools of stabilization policy when conventional interest-rate policy is constrained by the zero lower bound on interest rates, assuming that households and firms are capable of explicit forward planning over only a limited horizon. The predicted effects of all of the policies are somewhat different than under rational expectations, but credible announcements about future policy can still influence behavior, and there is, if anything, an even stronger case for pursuing systematic policies outside crisis periods in order to shape expectations during a crisis.

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Barsky, Robert, Alejandro Justiniano, and Leonardo Melosi. "The Natural Rate of Interest and Its Usefulness for Monetary Policy." American Economic Review 104, no. 5 (2014): 37–43. http://dx.doi.org/10.1257/aer.104.5.37.

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We estimate a state-of-the-art DSGE model to study the natural rate of interest in the United States over the last 20 years. The natural rate is highly procyclical, and fell substantially below zero in each of the last three recessions. Although the drop was of comparable magnitude across the three recessions, the decline was considerably more persistent in the Great Recession. We discuss the usefulness and limitations, particularly due to the zero lower bound, of the natural rate for the conduct of monetary policy.

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Maclachlan, Fiona. "Negative interest rates: a Keynesian perspective." Review of Keynesian Economics 7, no. 2 (2019): 171–84. http://dx.doi.org/10.4337/roke.2019.02.04.

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One of the most surprising recent developments in financial markets has been the emergence of negative yields on long-term debt. This development contradicts the notion of the zero lower bound which, until recently, was taken as a given in monetary policy discussions. In this paper, I look at the phenomenon of negative yields through the lens of Keynes's liquidity-preference theory of interest. I review changes to the financial market environment that have led to a shift in the liquidity of government bonds relative to bank deposits, and with this empirical context in place, I argue Keynes's theory is consistent with the phenomenon of negative bond yields. Finally, I consider Keynes's thought in relation to a negative interest-rate policy (NIRP) and argue that while he would be opposed to a NIRP as a temporary expedient, a mildly negative policy rate fits with his long-run vision for a world with a zero risk-free long-term interest rate.

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Lu, You-Xun. "The stabilizing effect of the zero lower bound: A perspective of interest rate target zones." Quarterly Review of Economics and Finance 84 (May 2022): 61–67. http://dx.doi.org/10.1016/j.qref.2022.01.014.

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23

Hloušek, Miroslav. "The Empirical Implications of the Zero Lower Bound on the Interest Rate: The Case of the Czech Economy." Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis 64, no. 2 (2016): 603–16. http://dx.doi.org/10.11118/actaun201664020603.

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This paper uses an estimated DSGE model of the Czech economy to study the macroeconomic implications of various shocks when the interest rate is constrained by the zero lower bound. The goal is to identify which shocks represent threats for the economy and how large the distortions are. The results show that four single shocks can take the economy to the zero lower bound, and that of the four, productivity shock in the tradable sector is the most dangerous. The consequences for the behaviour of macroeconomic variables are nontrivial and, quite naturally, increase with the size of the shock and the frequency of occurrence. If the economy is subject to all model specific shocks, there are distortions in terms of lower average values of output and consumption (by more than one percentage point) and higher inflation volatility (by more than six percentage points). To reduce these costs, the central bank should give higher weight to inflation and lower weight to the output gap in monetary policy rule.

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Miyamoto, Wataru, Thuy Lan Nguyen, and Dmitriy Sergeyev. "Government Spending Multipliers under the Zero Lower Bound: Evidence from Japan." American Economic Journal: Macroeconomics 10, no. 3 (2018): 247–77. http://dx.doi.org/10.1257/mac.20170131.

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Using a rich dataset on government spending forecasts in Japan, we provide new evidence on the effects of unexpected changes in government spending when the nominal interest rate is near the zero lower bound (ZLB). The on-impact output multiplier is 1.5 in the ZLB period and 0.6 outside of it. We estimate that government spending shocks increase both private consumption and investment during the ZLB period, but crowd them out in the normal period. There is evidence that expected inflation increases more in the ZLB period than in the normal period. (JEL E21, E22, E23, E31, E43, E52, E62)

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Oda, Nobuyuki, and Takashi Nagahata. "On the function of the zero interest rate commitment: Monetary policy rules in the presence of the zero lower bound on interest rates." Journal of the Japanese and International Economies 22, no. 1 (2008): 34–67. http://dx.doi.org/10.1016/j.jjie.2007.03.002.

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Swanson, Eric T., and John C. Williams. "Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates." American Economic Review 104, no. 10 (2014): 3154–85. http://dx.doi.org/10.1257/aer.104.10.3154.

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According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current short-term rate. Put differently, longer-term yields matter. We show how to measure the zero bound's effects on yields of any maturity. Indeed, 1- and 2-year Treasury yields were surprisingly unconstrained throughout 2008 to 2010, suggesting that monetary and fiscal policy were about as effective as usual during this period. Only beginning in late 2011 did these yields become more constrained. (JEL E43, E52, E62)

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Iwata, Shigeru, and Shu Wu. "A NOTE ON FOREIGN EXCHANGE INTERVENTIONS AT ZERO INTEREST RATES." Macroeconomic Dynamics 16, no. 5 (2012): 802–17. http://dx.doi.org/10.1017/s1365100512000120.

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This note uses a nonlinear structural vector autoregression model to empirically investigate the effectiveness of official foreign exchange (FX) interventions in an economy when interest rates are constrained to the zero level, based on Japanese data in the 1990s. The model allows us to estimate the effects of FX interventions operating through different channels. We find that FX interventions are still capable of influencing the foreign exchange rate in a zero-interest-rate environment, even though their effects are greatly reduced by the zero lower bound on interest rates. Our results suggest that although it might be feasible to use the exchange rate as an alternative monetary policy instrument at zero interest rates as proposed by McCallum (Inflation Targeting and the Liquidity Trap, NBER working paper 8225, 2000), the exchange rate–based Taylor rule may not be very effective in achieving the ultimate policy goals.

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Epstein, D., and P. Wilmott. "A New Model for Interest Rates." International Journal of Theoretical and Applied Finance 01, no. 02 (1998): 195–226. http://dx.doi.org/10.1142/s0219024998000114.

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There are many theories and models underlying the valuation of fixed income security portfolios. This work addresses the problem from a new perspective: the objective is to find a lower bound for the value of a portfolio of cash flows. We set up conditions for the evolution of a short-term interest rate and value a liability using its present value. We formulate a first-order nonlinear hyperbolic partial differential equation for the value, V, of the portfolio. We explore the solution of this equation and then hedge our portfolio with market-traded zero-coupon bonds of known value. We include some salient examples — generating the Yield Envelope and valuing caps, floors and bond options.

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Claus, Edda, Iris Claus, and Leo Krippner. "Monetary Policy Spillovers across the Pacific when Interest Rates Are at the Zero Lower Bound." Asian Economic Papers 15, no. 3 (2016): 1–27. http://dx.doi.org/10.1162/asep_a_00448.

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To conduct monetary policy effectively, central banks need to understand the transmission of monetary policy into financial markets. In this paper we investigate the effects of Japanese and U.S. monetary policy shocks on their own asset markets, and the spillovers into each other's markets. Because short-term nominal interest rates have been effectively zero in Japan since January 1998 and in the United States from late 2008, however, monetary policy shocks cannot be quantified by considering observable changes in short-term market interest rates. Therefore, in our analysis we use a shadow short rate―a quantitative measure of overall conventional and unconventional monetary policy that is estimated from the term structure of interest rates. Our results suggest that the operation of monetary policy at the zero lower bound of interest rates alters the transmission of shocks. In particular, we find a limited response of exchange rates during the first episode of unconventional monetary policy in Japan but a significant impact since 2006.

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Belke, Ansgar, and Matthias Göcke. "Interest Rates and Macroeconomic Investment under Uncertainty." Credit and Capital Markets – Kredit und Kapital: Volume 54, Issue 3 54, no. 3 (2021): 319–45. http://dx.doi.org/10.3790/ccm.54.3.319.

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The interest rate is generally considered as an important driver of macroeconomic investment characterised by a particular form of path dependency, “hysteresis”. At the same time, the interest rate channel is a central ingredient of monetary policy transmission. In this context, we shed light on the issue (which currently is a matter of concern for many central banks) whether uncertainty over future interest rates at the zero lower bound hampers monetary policy transmission. As an innovation we derive the exact shape of the “hysteretic” impact of rate changes on macroeconomic investment under different sorts of uncertainty. Starting with hysteresis effects on the micro level, we apply an adequate aggregation procedure to derive the interest rate effects on a macro level. Our results may serve as a guideline for future central banks’ policies on how to stimulate investment in times of low or even zero interest rates and uncertainty.

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Rogoff, Kenneth. "Dealing with Monetary Paralysis at the Zero Bound." Journal of Economic Perspectives 31, no. 3 (2017): 47–66. http://dx.doi.org/10.1257/jep.31.3.47.

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Recently, the key constraint for central banks is the zero lower bound on nominal interest rates. Central banks fear that if they push short-term policy interest rates too deeply negative, there will be a massive flight into paper currency. This paper asks whether, in a world where paper currency is becoming increasingly vestigial outside small transactions (at least in the legal, tax compliant economy), there might be relatively simple ways to finesse the zero bound without affecting how most ordinary people live. Surprisingly, this question gets little attention compared to the massive number of articles that take the zero bound as given and look for out-of-the-box solutions for dealing with it. In an inversion of the old joke, it is a bit as if the economics literature has insisted on positing “assume we don't have a can opener,” without considering the possibility that we might be able to devise one. It makes sense not to wait until the next financial crisis to develop plans. Fundamentally, there is no practical obstacle to paying negative (or positive) interest rates on electronic currency and, as we shall see, effective negative rate policy does not require eliminating paper currency.

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Nie, Yutian, and Vadim Linetsky. "Sticky reflecting Ornstein-Uhlenbeck diffusions and the Vasicek interest rate model with the sticky zero lower bound." Stochastic Models 36, no. 1 (2019): 1–19. http://dx.doi.org/10.1080/15326349.2019.1630287.

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Palley, Thomas I. "The fallacy of the natural rate of interest and zero lower bound economics: why negative interest rates may not remedy Keynesian unemployment." Review of Keynesian Economics 7, no. 2 (2019): 151–70. http://dx.doi.org/10.4337/roke.2019.02.03.

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This paper provides a critique of zero lower bound (ZLB) economics which has become the new orthodoxy for explaining stagnation. ZLB economics is an extension of pre-Keynesian economics which attributes macroeconomic dysfunction to rigidities and market imperfections. The ZLB is the latest rigidity in that pre-Keynesian tradition. The paper argues negative nominal interest rates, even if feasible, may be unable to remedy Keynesian demand shortage unemployment, and might even aggravate the problem. That is because there exist non-reproduced assets whose return dominates that of investment, and saving may also increase in response to negative rates. Consequently, there may be no natural rate of interest.

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Cao, Dan, Wenlan Luo, and Guangyu Nie. "Uncovering the Effects of the Zero Lower Bound with an Endogenous Financial Wedge." American Economic Journal: Macroeconomics 15, no. 1 (2023): 135–72. http://dx.doi.org/10.1257/mac.20200495.

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We study the effects of the zero lower bound (ZLB) on the severity of financial crises using an incomplete markets New Keynesian model with two occasionally binding constraints: a ZLB on the nominal interest rate and a borrowing constraint tied to an asset price. The model’s financial wedge corresponds to an endogenous multiplier on the borrowing constraint. Binding ZLB exacerbates financial crises through its interaction with the asset fire sale vicious cycle, driving up the financial wedge. Our results offer a novel reinterpretation of the negligible effect of the ZLB in representative agent New Keynesian models with exogenous wedges. (JEL E12, E31, E32, E43, E52, G01)

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Ngo, Phuong V. "Optimal discretionary monetary policy in a micro-founded model with a zero lower bound on nominal interest rate." Journal of Economic Dynamics and Control 45 (August 2014): 44–65. http://dx.doi.org/10.1016/j.jedc.2014.05.010.

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Acharya, Sushant, and Keshav Dogra. "The Side Effects of Safe Asset Creation." Journal of the European Economic Association 20, no. 2 (2021): 581–625. http://dx.doi.org/10.1093/jeea/jvab029.

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Abstract We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safe assets causes the zero lower bound (ZLB) to bind, increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. However, this entails permanently lower investment, which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt until the ZLB no longer binds raises welfare when alternative instruments are unavailable. Higher inflation targets instead allow for negative real interest rates and achieve full employment without reducing investment.

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Ngo, Phuong V. "THE RISK OF HITTING THE ZERO LOWER BOUND AND THE OPTIMAL INFLATION TARGET." Macroeconomic Dynamics 22, no. 2 (2017): 402–25. http://dx.doi.org/10.1017/s1365100516000262.

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I examine the optimal inflation target in a dynamic stochastic New Keynesian model featuring an occasionally binding zero lower bound on nominal interest rate (ZLB). To this end, I first calibrate the shock needed to generate the risk of hitting the ZLB that matches the U.S. data, based on a fully nonlinear method. I then resolve the model with different inflation targets and find that the optimal target is 3.4%. In addition, the optimal inflation target is a nonlinear function of the risk of hitting the ZLB and inflation indexation. It is always greater than 2% if the risk is greater than 2.5% or if the inflation indexation is higher than 0.5. Finally, the linear–quadratic approach overestimates the true optimal inflation target. In particular, based on the benchmark calibration, it generates an optimal target of 5.5%, compared with 3.4% found by the fully nonlinear method.

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Xavier, Inês. "Bubbles and Stagnation." Finance and Economics Discussion Series 2022, no. 033 (2022): 1–32. http://dx.doi.org/10.17016/feds.2022.033.

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This paper studies the consequences of asset bubbles for economies that are vulnerable to persistent stagnation. Stagnation is the result of a shortage of assets that creates an oversupply of savings and puts downward pressure on the level of interest rates. Once the zero lower bound on the nominal interest rate binds, the real rate cannot fully adjust downward, forcing output to fall instead. In such context, bubbles are useful as they expand the supply of assets, absorb excess savings and raise the natural interest rate - the real rate that is compatible with full employment - crowding in consumption and raising welfare. While safe bubbles are more likely to expand economic activity, riskier bubbles command a risk premium that, in equilibrium, lowers the real interest rate. A lower rate loosens borrowing constraints, potentially improving welfare when financing conditions are especially tight. Finally, fiscal policy that promises a bail-out transfer in case of a bubble collapse can support an existing bubble and improve welfare.

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Christensen, Jens H. E., and Glenn D. Rudebusch. "A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt." Review of Economics and Statistics 101, no. 5 (2019): 933–49. http://dx.doi.org/10.1162/rest_a_00821.

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The downtrend in U.S. interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest. We examine this issue using dynamic term structure models that account for time-varying term and liquidity risk premiums and are estimated directly from prices of individual inflation-indexed bonds. Our finance-based approach avoids two potential pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and misspecification of output and inflation dynamics. We estimate that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.

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Belke, Ansgar, and Christian Dreger. "Did Interest Rates at the Zero Lower Bound Affect Lending of Commercial Banks? Evidence for the Euro Area." Jahrbücher für Nationalökonomie und Statistik 239, no. 5-6 (2019): 841–60. http://dx.doi.org/10.1515/jbnst-2018-0098.

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Abstract The paper examines the bank lending activities of banks in a low interest rate environment. External financing of small- and medium-sized enterprises in the euro area primarily takes place via bank loans and not through capital markets. Based on the Bankscope database, bank balance sheet data is utilized. Control variables are included, such as for the system of banking regulation. The panel estimation includes 706 banks from 15 Euro area member states and is conducted for the period 2000 to 2015. All models show a significant positive impact of lower interest rates on net lending. In particular, the results do not indicate that credit is restricted if interest rates move towards the zero-lower bound.

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Korinek, Anton, and Alp Simsek. "Liquidity Trap and Excessive Leverage." American Economic Review 106, no. 3 (2016): 699–738. http://dx.doi.org/10.1257/aer.20140289.

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We investigate the role of macroprudential policies in mitigating liquidity traps. When constrained households engage in deleveraging, the interest rate needs to fall to induce unconstrained households to pick up the decline in aggregate demand. If the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In this environment, households' ex ante leverage and insurance decisions are associated with aggregate demand externalities. Welfare can be improved with macroprudential policies targeted toward reducing leverage. Interest rate policy is inferior to macroprudential policies in dealing with excessive leverage. (JEL D14, E23, E32, E43, E52, E61, E62)

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Diaz-Roldan, Carmen, María A. Prats, and Maria del Carmen Ramos-Herrera. "Redefining monetary policy rules: A threshold approach." PLOS ONE 16, no. 5 (2021): e0252316. http://dx.doi.org/10.1371/journal.pone.0252316.

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In this paper, we try to analyse the extent to which a redefinition of the monetary policy rule would help to avoid the zero-lower bound, as well as to explore the conditions needed to avoid that constraint. To that aim, we estimate the threshold values of the key variables of the policy rule: the inflation gap and the output gap. The threshold model allows us to know which are the turning points from which the relationship between the key variables and the interest rate revert. In the Eurozone countries, we have found that the inflation gap always contributes to increasing the nominal interest rate. On the contrary, the output gap works differently when it reaches values above or below the threshold value, which would favour the reduction of the interest rates towards the zero level.

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Schmitt-Grohé, Stephanie, and Martín Uribe. "Liquidity Traps and Jobless Recoveries." American Economic Journal: Macroeconomics 9, no. 1 (2017): 165–204. http://dx.doi.org/10.1257/mac.20150220.

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This paper proposes a model that explains the joint occurrence of liquidity traps and jobless growth recoveries. Its key elements are downward nominal wage rigidity, a Taylor-type interest rate feedback rule, the zero lower bound on nominal interest rates, and a confidence shock. Absent a change in policy, the model predicts that low inflation and high unemployment become chronic. With capital accumulation, the model predicts, in addition, an investment slump. The paper identifies a New Fisherian effect, whereby raising the nominal interest rate to its intended target for an extended period of time can boost inflationary expectations and thereby foster employment. (JEL E24, E31, E32, E43, E52, F44, G01)

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Farmer, Leland E. "The discretization filter: A simple way to estimate nonlinear state space models." Quantitative Economics 12, no. 1 (2021): 41–76. http://dx.doi.org/10.3982/qe1353.

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Existing methods for estimating nonlinear dynamic models are either highly computationally costly or rely on local approximations which often fail adequately to capture the nonlinear features of interest. I develop a new method, the discretization filter, for approximating the likelihood of nonlinear, non‐Gaussian state space models. I establish that the associated maximum likelihood estimator is strongly consistent, asymptotically normal, and asymptotically efficient. Through simulations, I show that the discretization filter is orders of magnitude faster than alternative nonlinear techniques for the same level of approximation error in low‐dimensional settings and I provide practical guidelines for applied researchers. It is my hope that the method's simplicity will make the quantitative study of nonlinear models easier for and more accessible to applied researchers. I apply my approach to estimate a New Keynesian model with a zero lower bound on the nominal interest rate. After accounting for the zero lower bound, I find that the slope of the Phillips Curve is 0.076, which is less than 1/3 of typical estimates from linearized models. This suggests a strong decoupling of inflation from the output gap and larger real effects of unanticipated changes in interest rates in post Great Recession.

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Farmer, Leland E. "The discretization filter: A simple way to estimate nonlinear state space models." Quantitative Economics 12, no. 1 (2021): 41–76. http://dx.doi.org/10.3982/qe1353.

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Existing methods for estimating nonlinear dynamic models are either highly computationally costly or rely on local approximations which often fail adequately to capture the nonlinear features of interest. I develop a new method, the discretization filter, for approximating the likelihood of nonlinear, non‐Gaussian state space models. I establish that the associated maximum likelihood estimator is strongly consistent, asymptotically normal, and asymptotically efficient. Through simulations, I show that the discretization filter is orders of magnitude faster than alternative nonlinear techniques for the same level of approximation error in low‐dimensional settings and I provide practical guidelines for applied researchers. It is my hope that the method's simplicity will make the quantitative study of nonlinear models easier for and more accessible to applied researchers. I apply my approach to estimate a New Keynesian model with a zero lower bound on the nominal interest rate. After accounting for the zero lower bound, I find that the slope of the Phillips Curve is 0.076, which is less than 1/3 of typical estimates from linearized models. This suggests a strong decoupling of inflation from the output gap and larger real effects of unanticipated changes in interest rates in post Great Recession.

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Sinelnikova-Muryleva, Elena, and Alina Grebenkina. "Discussion on Inflation Target Optimality." Moscow University Economics Bulletin 2020, no. 3 (2020): 3–24. http://dx.doi.org/10.38050/01300105202031.

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The article focuses on the existing gap between theoretically optimal (often close to zero) and empirically observed (targeted by central banks, explicitly positive) rate of inflation. In order to reduce this gap, the article proposes some theoretical explanations of a positive rate of optimal inflation, the main cause of which are labor market frictions, financial market frictions and risk of achieving zero lower bound of nominal interest rates in the economy (also known as ZLB problem). Using a case-study approach, the article shows that ZLB factor contributes to a significant increase of optimal inflation rate in the countries with relevant experience. Consequently, ZLB factor provides a necessary, though not sufficient, argument in central banks’ discussion concerning inflation target.

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Tatay, Tibor, Zsanett Orlovits, and Zsuzsanna Novák. "Inhomogeneous Financial Markets in a Low Interest Rate Environment—A Cluster Analysis of Eurozone Economies." Risks 10, no. 10 (2022): 192. http://dx.doi.org/10.3390/risks10100192.

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In the present paper, we investigate the financial homogeneity of the euro area economies by contrasting eurozone countries’ responses to monetary policy steps to the theoretical assumptions of the liquidity trap phenomenon. Our assumption is that the euro area economies are not completely homogeneous. Hence, in a zero-interest rate environment, the asset holding decisions of economic agents exhibit detectable differences across countries. We verify our assumptions using Eurostat data. We use the financial asset stocks of the euro area countries to cluster the countries concerned. Previous literature has not examined changes in the ratio of financial assets to GDP, nor differences in structural changes in the total stock of financial assets under the zero lower bound. The paper uses k-centers cluster analysis based on Euclidean distance for detecting changes in the portfolio holdings of eurozone economic actors owing to economic crises and monetary policy responses. The results confirm that euro area financial markets are fragmented. There are significant differences across asset markets of different Eurozone countries, both during and after the crisis. Despite some similarities in the portfolio rearrangement across countries, the ECB’s monetary policy does not have a uniform impact on euro area financial markets, and notable differences prevail in the financial asset structures of the economies concerned.

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Benigno, Pierpaolo, Gauti B. Eggertsson, and Federica Romei. "Dynamic Debt Deleveraging and Optimal Monetary Policy." American Economic Journal: Macroeconomics 12, no. 2 (2020): 310–50. http://dx.doi.org/10.1257/mac.20160124.

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This paper proposes a postcrisis New Keynesian model that incorporates agent heterogeneity in borrowing and lending with a minimum set of assumptions. Unlike the standard framework, this model makes the natural rate of interest endogenous and dependent on macroeconomic policy. The main application is to study optimal monetary policy at the zero lower bound (ZLB). Such policy succeeds in raising the natural rate of interest by creating an environment that speeds up deleveraging and thus endogenously shortens the crisis and the duration of binding ZLB. Inflation should be front-loaded and should overshoot its long-term target during the ZLB episode. (JEL E12, E31, E32, E43, E52)

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Guerrieri, Veronica, and Guido Lorenzoni. "Credit Crises, Precautionary Savings, and the Liquidity Trap*." Quarterly Journal of Economics 132, no. 3 (2017): 1427–67. http://dx.doi.org/10.1093/qje/qjx005.

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Abstract We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers’ borrowing capacity, constrained consumers are forced to repay their debt, and unconstrained consumers increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with sticky prices, if the zero lower bound prevents the interest rate from adjusting downward. Adding durable goods to the model, households take larger debt positions and the output response can be larger.

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Eggertsson, Gauti B., Neil R. Mehrotra, and Jacob A. Robbins. "A Model of Secular Stagnation: Theory and Quantitative Evaluation." American Economic Journal: Macroeconomics 11, no. 1 (2019): 1–48. http://dx.doi.org/10.1257/mac.20170367.

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This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from − 1.5 percent to − 2 percent, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates. (JEL E12, E23, E31, E32, E43, E52)

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