THE RISK OF HITTING THE ZERO LOWER BOUND AND THE OPTIMAL INFLATION TARGET

2017 ◽  
Vol 22 (2) ◽  
pp. 402-425 ◽  
Author(s):  
Phuong V. Ngo
Keyword(s):  
Lower Bound ◽  
Nonlinear Function ◽  
Zero Lower Bound ◽  
Nonlinear Method ◽  
Linear Quadratic ◽  
Inflation Target ◽  
Fully Nonlinear ◽  
Optimal Target ◽  
Dynamic Stochastic ◽  
Fully Nonlinear Method

I examine the optimal inflation target in a dynamic stochastic New Keynesian model featuring an occasionally binding zero lower bound on nominal interest rate (ZLB). To this end, I first calibrate the shock needed to generate the risk of hitting the ZLB that matches the U.S. data, based on a fully nonlinear method. I then resolve the model with different inflation targets and find that the optimal target is 3.4%. In addition, the optimal inflation target is a nonlinear function of the risk of hitting the ZLB and inflation indexation. It is always greater than 2% if the risk is greater than 2.5% or if the inflation indexation is higher than 0.5. Finally, the linear–quadratic approach overestimates the true optimal inflation target. In particular, based on the benchmark calibration, it generates an optimal target of 5.5%, compared with 3.4% found by the fully nonlinear method.

scholarly journals DOES CALVO MEET ROTEMBERG AT THE ZERO LOWER BOUND?

2019 ◽  
pp. 1-22 ◽  
Author(s):  
Jianjun Miao ◽  
Phuong V. Ngo
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Resource Constraints ◽  
Order Approximation ◽  
Adjustment Costs ◽  
Zero Lower Bound ◽  
Nonlinear Method ◽  
The Difference ◽  
Fully Nonlinear Method ◽  
First Order Approximation

This paper compares the conventional Calvo and Rotemberg price adjustments at the zero lower bound (ZLB) on nominal interest rates. Although the two pricing mechanisms are equivalent to a first-order approximation around the zero-inflation steady state, they produce very different results, based on a fully-nonlinear method. Specifically, the nominal interest rate hits the ZLB more frequently in the Calvo model than in the Rotemberg model. At the ZLB, deflation is larger and recessions are more severe in the Calvo model. The main reason for the difference in results is that price adjustment costs show up in the resource constraints in the Rotemberg. When they are rebated to the household, the two models behave similarly.

scholarly journals A method for computing unsteady fully nonlinear interfacial waves

1997 ◽  
Vol 351 ◽  
pp. 223-252 ◽  
Author(s):  
JOHN GRUE ◽  
HELMER ANDRÉ FRIIS ◽  
ENOK PALM ◽  
PER OLAV RUSÅS
Keyword(s):  
Solitary Waves ◽  
Bottom Topography ◽  
The Body ◽  
Interfacial Waves ◽  
Nonlinear Method ◽  
Fully Nonlinear ◽  
Weakly Nonlinear ◽  
Taylor Series Expansions ◽  
Layer Flow ◽  
Fully Nonlinear Method

We derive a time-stepping method for unsteady fully nonlinear two-dimensional motion of a two-layer fluid. Essential parts of the method are: use of Taylor series expansions of the prognostic equations, application of spatial finite difference formulae of high order, and application of Cauchy's theorem to solve the Laplace equation, where the latter is found to be advantageous in avoiding instability. The method is computationally very efficient. The model is applied to investigate unsteady trans-critical two-layer flow over a bottom topography. We are able to simulate a set of laboratory experiments on this problem described by Melville & Helfrich (1987), finding a very good agreement between the fully nonlinear model and the experiments, where they reported bad agreement with weakly nonlinear Korteweg–de Vries theories for interfacial waves. The unsteady transcritical regime is identified. In this regime, we find that an upstream undular bore is generated when the speed of the body is less than a certain value, which somewhat exceeds the critical speed. In the remaining regime, a train of solitary waves is generated upstream. In both cases a corresponding constant level of the interface behind the body is developed. We also perform a detailed investigation of upstream generation of solitary waves by a moving body, finding that wave trains with amplitude comparable to the thickness of the thinner layer are generated. The results indicate that weakly nonlinear theories in many cases have quite limited applications in modelling unsteady transcritical two-layer flows, and that a fully nonlinear method in general is required.

scholarly journals Ten Years Later: Lessons for DSGE Builders and Czech Policy Makers

2019 ◽  
Vol 19 (3) ◽  
pp. 159-174
Author(s):  
Aleš Michl
Keyword(s):  
Czech Republic ◽  
Fiscal Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Open Economy ◽  
Zero Lower Bound ◽  
Government Investment ◽  
The Czech Republic ◽  
Equilibrium Approach ◽  
Dynamic Stochastic

Abstract We show an example of a small open economy – the Czech Republic – where the fiscal restriction was put in place between 2010 and 2013 in a negative output gap and zero lower bound on nominal interest rates. According to our results, such fiscal policy seems to have been mistaken, as the restriction may apparently have caused a second recession in the Czech Republic in 2012/2013 (after the global recession in 2008/2009). Instead of the dynamic stochastic general equilibrium approach (DSGE), we applied a tractable static deterministic partial equilibrium approach using the IS-LM framework. We derived mathematically from the IS-LM model that expansionary fiscal policy acting via higher government investment can be an appropriate tool for reacting to a crisis in the very short run when interest rates hit the zero lower bound. Expansionary fiscal policy after the 2008/2009 crisis would probably have led to faster stabilisation of the Czech economy. We simulate a potential increase in government investment of 8% yearly between 2011 and 2013. This would have added 0.4 pp to GDP growth and increased the inflation rate by about 0.5 pp. Hence, the inflation outlook in 2013 would not have been negative and would consequently have led to less pressure for monetary policy expansion using unconventional interventions against the Czech koruna.

Optimal Inflation Target in an Economy with Menu Costs and a Zero Lower Bound

2021 ◽  
Vol 13 (3) ◽  
pp. 108-141
Author(s):  
Andrés Blanco
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Empirical Distribution ◽  
Cost Model ◽  
Zero Lower Bound ◽  
Menu Costs ◽  
Inflation Target ◽  
Firm Level ◽  
Resource Misallocation ◽  
Model Features

I study the optimal inflation target in a quantitative menu cost model with a zero lower bound on interest rates. I find that the optimal inflation target is 3.5 percent, which is higher than in models commonly used for monetary policy analysis. Key to this result is that inflation has a small effect on resource misallocation when the model features firm-level shocks, which are necessary to match the empirical distribution of price changes. A higher inflation target decreases price flexibility at the zero lower bound, and through this mechanism, it reduces the severity of recessions when the monetary authority is constrained. (JEL E12, E31, E32, E42, E52)

scholarly journals Inflation Target and its Impact on Macroeconomy in the Zero Lower Bound Environment: the case of the Czech economy

2016 ◽  
Vol 16 (1) ◽  
pp. 3-16 ◽  
Author(s):  
Miroslav Hloušek
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Stochastic Simulation ◽  
Zero Lower Bound ◽  
Dsge Model ◽  
Inflation Target ◽  
Target Setting ◽  
Target Values ◽  
Inflation Targets

Abstract This paper uses a stochastic simulation of a DSGE model of the Czech economy to study the macroeconomic consequences of inflation target setting when interest rates are constrained by the zero lower bound. The distortions of this constraint depend non-linearly on the inflation target. For an inflation target of two percent the costs are negligible, but they increase steeply with lower target values. The largest impact is on the average values of output, consumption and investment; inflation is only slightly influenced. The volatility of all the variables considered increases significantly, but only for inflation targets that are close to zero. An inflation target of four percent does not bring additional benefits either in terms of lower volatility or in terms of higher average values.

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