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Infrequent but Long-Lived Zero Lower Bound Episodes and the Optimal Rate of Inflation

  • Author(s): Carreras, Marc Dordal I
  • Coibion, Olivier
  • Gorodnichenko, Yuriy
  • Wieland, Johannes
  • et al.

Published Web Location

http://eml.berkeley.edu/~ygorodni/CDGW_optimal_inflation.pdf
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Abstract

Countries rarely hit the zero lower bound (ZLB) on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to incorporate jointly into macroeconomic models using typical representations of shock processes. We introduce a regime-switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. We discuss what different calibrations of this model imply for optimal inflation rates.

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