Gains from Wage Flexibility and the Zero Lower Bound*

The Zero Lower Bound

In the standard New Keynesian model, monetary policy is often described by an interest rate rule (e.g. a Taylor rule) that moves the interest rate in response to deviations of inflation and some measure of economic activity from target. Nominal interest rates are bound from below by 0 – since money is storable, one would never accept a negative nominal return. How does the behavior of the NK mo...

Exchange Rate Flexibility under the Zero Lower Bound: the Need for Forward Guidance

Macroeconomic theory says that when a country is vulnerable to idiosyncratic macro shocks, it should have its own currency and a flexible exchange rate. But recently in many countries, interest rates have been pushed down close to the lower bound, limiting the ability of policy-makers to accommodate shocks, even in countries with flexible exchange rates. This paper argues that if the zero bound...

Government Spending Multipliers under Zero Lower Bound: Evidence from Japan∗

Using a rich data set on government spending forecasts, we estimate the effects of unexpected government spending both when the nominal interest rate is near zero lower bound (ZLB) and outside of ZLB period in Japan. The output multiplier is 1.5 on impact in the ZLB period while it is 0.7 outside of the ZLB period. We argue that this result is not driven by the amount of slack in the economy. W...

Wage flexibility

The Zero Lower Bound and the Dual Mandate

This article uses a DSGE framework to evaluate the role of monetary policy in determining the likelihood of encountering the zero lower bound. We find that the probability of experiencing episodes of being at zero lower bound depends almost exclusively on the monetary policy rule. A policy rule, such as the one proposed by Taylor (1993) which is based on the dual mandate is highly likely to lea...