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The Zero Lower Bound: Frequency, Duration, and Determinacy

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  • Alexander W. Richter
  • Nathaniel A. Throckmorton

Abstract

When monetary policy faces a zero lower bound (ZLB) constraint on the nominal interest rate, determinacy is not guaranteed even if the Taylor principle is satisfied when the ZLB does not bind. This paper shows the boundary of the determinacy region imposes a clear tradeoff between the expected frequency and average duration of ZLB events. We show this tradeoff using a global solution to a nonlinear New Keynesian model with two alternative stochastic processes?one where monetary policy follows a 2-state Markov chain, which exogenously governs whether the ZLB binds, and the other where ZLB events arise endogenously due to technology shocks. In both cases, the household accounts for the possibility of going to and exiting the ZLB in expectation. We quantify the expectation al effect of the ZLB and show it depends on the parameters of the stochastic process.

Suggested Citation

  • Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "The Zero Lower Bound: Frequency, Duration, and Determinacy," Auburn Economics Working Paper Series auwp2013-16, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2013-16
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    More about this item

    Keywords

    Monetary policy; zero lower bound; determinacy; global solution method;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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