Infrequent But Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation

Download or read book Infrequent But Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation written by Marc Dordal-i-Carreras and published by . This book was released on 2016 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Countries rarely hit the zero-lower bound on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to jointly incorporate into macroeconomic models using typical representations of shock processes. We introduce a regime switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. We discuss what different calibrations of this model imply for optimal inflation rates.