Optimal Monetary Policy Under Commitment with a Zero Bound on Nominal Interest Rates

Adam, Klaus; Billi, Roberto M.

doi:10.2139/ssrn.437141

Cited by 19 publications

(33 citation statements)

References 14 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In Appendix E.2, I show that the exact specification of the Taylor rule is inconsequential for the following results. The rest of the calibration is taken from Adam and Billi (2006) and Andrade et al (2019). Table 4 summarizes the calibration.…”

Section: A New Keynesian Model With Limited Attentionmentioning

confidence: 99%

“…where χ is the relative weight of the output gap. Following Adam and Billi (2006), I set χ = 0.007. In the following, I refer to (18) as welfare.…”

Section: Implications For Optimal Monetary Policymentioning

confidence: 99%

“…The early literature on the optimal inflation rate usually found an optimal inflation rate of close to zero (see Schmitt-Grohé and Uribe (2010)), even when accounting for the effective lower bound (Adam and Billi (2006), ). More recent studies challenge this view.…”

Section: Introductionmentioning

confidence: 99%

“…For textbook analysis of optimal monetary policy under rational expectations, see e.g.,Woodford (2003) orGalí (2015). SeeEggertsson and Woodford (2003),Adam and Billi (2006) orCoibion, Gorodnichenko, and Wieland (2012) for early analyses including the lower bound on nominal interest rates.2 Most recently,Candia, Coibion, and Gorodnichenko (2021) andCoibion, Gorodnichenko, Knotek, and Schoenle (2020) show that US firms as well as households are usually poorly informed about and quite inattentive to monetary policy. Gorodnichenko (2012, 2015a), for example, show that models of limited attention more closely align with empirical patterns of inflation expectations, compared to models of FIRE.…”

mentioning

confidence: 99%

“… See, e.g., Woodford (2003) orGalí (2015) for the derivation of this model, andAdam and Billi (2006) for the analysis of how the optimal monetary policy changes in the presence of an ELB constraint.…”

mentioning

confidence: 99%

See 4 more Smart Citations

Inflation -- who cares? Monetary Policy in Times of Low Attention

Pfäuti¹

2021

Preprint

View full text Add to dashboard Cite

Based on a model of optimal information acquisition, I propose an approach to measure attention to inflation in the data. Applying this approach to US consumers and professional forecasters provides substantial evidence that attention to inflation in the US decreased significantly over the last five decades. Consistent with the theoretical model, attention covaries positively with inflation volatility and persistence. To examine the consequences of limited attention for monetary policy, I augment the standard New Keynesian model with a lower-bound constraint on the nominal interest rate and inflation expectations that are characterized by limited attention. Accounting for the lower bound fundamentally alters the normative implications of declining attention. While lower attention raises welfare absent the lower-bound constraint, it decreases welfare when accounting for the lower bound. In fact, limited attention can lead to inflation-attention traps: prolonged periods of a binding lower bound and low inflation due to slowly-adjusting inflation expectations. To prevent these traps, it is optimal to increase the inflation target as attention declines.

show abstract

Section: A New Keynesian Model With Limited Attentionmentioning

confidence: 99%

“…where χ is the relative weight of the output gap. Following Adam and Billi (2006), I set χ = 0.007. In the following, I refer to (18) as welfare.…”

Section: Implications For Optimal Monetary Policymentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%