Infrequent but long-lived zero lower bound episodes and the optimal rate of inflation
(joint with Olivier Coibion, Yuriy Gorodnichenko and Johannes Wieland)Published in Annual Review of Economics, 2016
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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Recommended citation: Dordal i Carreras, Marc, Olivier Coibion, Yuriy Gorodnichenko, and Johannes Wieland. “Infrequent but long-lived zero lower bound episodes and the optimal rate of inflation.” Annual Review of Economics 8 (2016): 497-520. https://www.annualreviews.org/doi/abs/10.1146/annurev-economics-080315-015306