The stochastic lower bound

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 24 August 2018

Staff Working Paper No. 754

By Riccardo M Masolo and Pablo E Winant

Since the Great Recession policy rates have been extremely low, but neither absolutely constant, nor exactly set to zero. We thus augment a standard zero lower bound model to study the effects of a stochastic lower bound (SLB) on policy rates. We find that a less predictable SLB helps keep inflation closer to target by lowering expectations of future values of the SLB when interest rate cuts are not an option.

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