Low rates, zero lower bound and monetary policy black hole

ABSTRACT

This article provides an analytical characterization of the effects of supply shocks and demand shocks on the economy of long-term zero lower bound. We consider a tractable New Keynesian model with price stickiness and show that supply shocks will make the economy more tightening while demand shocks will make the economy more expansionary.

KEYWORDS:

• Low interest rates
• zero lower bound
• monetary policy black hole
• fiscal policy

JEL CLASSIFICATION:

• E43
• E52
• E62

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Lawrence Summers and Rachel (2019): Global economy is at risk from a monetary policy black hole. https://www.ft.com/comment/columnists/lawrence-summers.

² Article in the Brookings Institute blog, 13 September 2016, entitled ‘Modifying the Fed’s policy framework: Does a higher inflation target beat negative interest rates?’

https://www.brookings.edu/blog/ben-bernanke/2016/09/13/modifying-the-feds-policy-framework-does-a-higher-inflation-target-beat-negative-interest-rates/.

³ Other parameters in a monetary policy rule most likely change when ${\rho }_i$ changes in estimates. The system is complex; to be able to focus at one question at hand only ${\rho }_i$ is varied.

Additional information

Funding

The research was supported by the National Natural Science Foundation of China (No.71873014).