nr 117 - Note on zero lower bound worries

DNB Working Papers
Publicatiedatum 17 oktober 2006

Although some authors have suggested that monetary expansion is still possible when the monetary policy interest rate cannot be reduced further, central banks tend to avoid interest rates close to the zero lower bound. Taking into account central banks.aversion to very low interest rates, we investigate optimal monetary policy in a New-Keynesian macro-economic model. Our analysis shows that appointing a central banker with a high aversion to low interest rate levels can mitigate the zero bound risk at the cost of persistent in.ation deviations from target. If fear of the zero lower bound is unfounded, it is better to appoint a central banker with no aversion to the zero lower bound, who will not shy away from unorthodox policies when the policy interest rate cannot be reduced further.JEL codes: E58, E52, E31 Key words: zero lower bound, inflation bias.