The Pitfalls of Speed-Limit Interest Rate Rules at the Zero Lower Bound

Brendon, Charles; Paustian, Matthias; Yates, Tony

doi:10.2139/ssrn.2280310

Cited by 4 publications

(6 citation statements)

References 18 publications

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“…The message of our paper echoes those of Blake, Kirsanova, and Yates (2013) and Brendon, Paustian, and Yates (2013) which provide caveats to speed-limit policies in different setups. Blake, Kirsanova, and Yates (2013) show that, when a persistent endogenous variable-such as capital-is introduced into an otherwise standard New Keynesian model without the ZLB, there are multiple equilibria under the standard discretionary policy.…”

Section: Introductionsupporting

confidence: 79%

“…They find that SLPs often improve welfare in one equilibrium, but worsen welfare in another. Brendon, Paustian, and Yates (2013) examine the desirability of adding an output growth stabilization term in an interest rate feedback rule in the New Keynesian model with the ZLB constraint. They find that the combination of SLP and the ZLB constraint can generate belief-driven recessions.…”

Section: Introductionmentioning

confidence: 99%

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Speed Limit Policy and Liquidity Traps

Nakata

Schmidt

Yoo³

2018

FEDS

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The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs)-policies aimed at stabilizing the output growth-less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding.

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Section: Introductionsupporting

confidence: 79%

Section: Introductionmentioning

confidence: 99%

Speed Limit Policy and Liquidity Traps

Nakata

Schmidt

Yoo³

2018

FEDS

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“…All these papers, however, abstract from the ZLB constraint: our contribution is to examine the desirability of speed-limit policy in models with the ZLB constraint. 4 The message of our paper echoes those of Blake, Kirsanova, and Yates (2013) and Brendon, Paustian, and Yates (2013) which provide caveats to speed-limit policies in different setups. Blake, Kirsanova, and Yates (2013) show that, when a persistent endogenous variable-such as capital-is introduced into an otherwise standard New Keynesian model without the ZLB, there are multiple equilibria under the standard discretionary policy.…”

Section: Introductionsupporting

confidence: 64%

Speed Limit Policy and Liquidity Traps

2018

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“…11. A binding zero lower bound can result in equilibrium nonexistence or in multiple equilibria, as noted in other research such as Brendon, Paustian, and Yates (2013). We examined this later possibility by inspecting every possible configuration of dates at which the ZLB might bind between 1 and 40 quarters in the future, subject to the condition that the ZLB begins to bind within four quarters of the start of the simulation and that the ZLB does not bind again following liftoff.…”

Section: Endnotesmentioning

confidence: 98%

Effective Monetary Policy Strategies in New Keynesian Models: A Reexamination

Chung

Herbst

Kiley

2015

NBER Macroeconomics Annual

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We explore the importance of the nature of nominal price and wage adjustment for the design of effective monetary policy strategies, especially at the zero lower bound. Our analysis suggests that sticky-price and sticky-information models fit standard macroeconomic time series comparably well. However, the model with information rigidity responds differently to anticipated shocks and persistent zero lower bound episodes-to a degree important for monetary policy and for understanding the effects of fundamental disturbances when monetary policy cannot adjust. These differences may be important for understanding other policy issues as well, such as fiscal multipliers. Despite these differences, many aspects of effective policy strategy are common across the two models: in particular, highly inertial interest rate rules that respond to nominal income or the price level perform well, even when hit by adverse supply shocks or large demand shocks that induce the zero lower bound. Rules that respond to the level or change in the output gap can perform poorly under those conditions.

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The Pitfalls of Speed-Limit Interest Rate Rules at the Zero Lower Bound

Cited by 4 publications

References 18 publications

Speed Limit Policy and Liquidity Traps

Speed Limit Policy and Liquidity Traps

Speed Limit Policy and Liquidity Traps

Effective Monetary Policy Strategies in New Keynesian Models: A Reexamination

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