Since the Great Recession policy rates have been extremely low, but neither absolutely constant, nor exactly set to zero. We thus augment a standard Zero Lower Bound (ZLB) model to study the effects of a Stochastic Lower Bound (SLB) on policy rates. We find that a less predictable SLB reduces the deflationary effects of negative demand shocks by lowering expectations of future values of the SLB at times when interest-rate cuts are not an option.
Masolo, R. M., Winant, P. E., The Stochastic Lower Bound, <<ECONOMICS LETTERS>>, 2019; 180 (July): 54-57. [doi:10.1016/j.econlet.2019.03.026] [https://hdl.handle.net/10807/227841]
The Stochastic Lower Bound
Masolo, Riccardo Maria
Formal Analysis
;
2019
Abstract
Since the Great Recession policy rates have been extremely low, but neither absolutely constant, nor exactly set to zero. We thus augment a standard Zero Lower Bound (ZLB) model to study the effects of a Stochastic Lower Bound (SLB) on policy rates. We find that a less predictable SLB reduces the deflationary effects of negative demand shocks by lowering expectations of future values of the SLB at times when interest-rate cuts are not an option.
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