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The zero lower bound on the interest rate and a Neo-Classical Phillips curve

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  • Ragna Alstadheim

    (Norges Bank (Central Bank of Norway))

Abstract

With sticky prices, optimizing agents and money in the utility function, I derive the exact analytical solution for optimal monetary policy given a zero lower bound (ZLB) on the interest rate. The Phillips curve is Neo-Classical, and the ZLB is then not a constraint on optimal policy. Optimal policy is history dependent even without a commitment problem and implements a Friedman rule equilibrium. The role of forward guidance in policy is more limited than under a New-Keynesian Phillips curve. The optimal policy rule intercept term is time varying and depends on the variance of the natural real rate.

Suggested Citation

  • Ragna Alstadheim, 2010. "The zero lower bound on the interest rate and a Neo-Classical Phillips curve," Working Paper 2010/13, Norges Bank.
    • Handle: RePEc:bno:worpap:2010_13
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    More about this item

    Keywords

    Zero Lower Bound on Interest Rates; Monetary Policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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