Working Paper: NBER ID: w7677
Authors: Bennett T. McCallum
Abstract: This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic stabilizing properties of Taylor rules in a ZLB context. The most important argument, however, is that if the short nominal rate is immobilized at zero, there nevertheless exists a route for monetary stabilization policy to be effective--- via the foreign exchange market. Its quantitative importance is examined in a calibrated, optimizing, open-economy model.
Keywords: No keywords provided
JEL Codes: E40; E50; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| zero lower bound (ZLB) on nominal interest rates (E43) | monetary policy effectiveness (E52) |
| nominal interest rates fixed at zero (E43) | pathway for effective monetary stabilization (E63) |
| transaction costs and properties of money (E41) | relationship between nominal interest rates and real rates (E43) |
| low sustained inflation (E31) | real interest rates (E43) |
| policy target inflation rates lowered (E52) | steady-state real rates of interest (E43) |