Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate

• DOI: 10.2139/ssrn.804785
• Publication Date: 2011-12-28T16:29:18Z
• Authors: Anton A. Nakov
• Keywords: Zero (linguistics); Zero lower bound; International Fisher effect

Recent treatments of the issue a zero floor on nominal interest rates have been subject to some important methodological limitations. These include assumption perfect foresight or introduction lower bound as an initial condition constraint variance rate, rather than occasionally binding non-negativity constraint. This paper addresses these issues offering global solution standard dynamic stochastic sticky price model with explicit rate. It turns out that dynamics and sometimes unconditional means inflation output gap are strongly affected by uncertainty in presence bound. Commitment optimal rule reduces welfare losses around one-tenth those achievable under discretionary policy, while constant level targeting delivers which only 60% larger rule. Even though performance simple instrument rules is almost unaffected bound, conditional strong deflationary shock perform substantially worse policy.