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 Locationhttp://eml.berkeley.edu/~ygorodni/CDGW_optimal_inflation.pdf
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.