Title: On zero lower bound traps: a framework for the analysis of monetary policy in the "age" of central banks
Abstract: Conventional explanations of how a growing potential output generates an equi-proportional
increase in aggregate demand in the long run rely either on the operation of the real balance effect or on a
combination of the permanent income hypothesis and the assumption of individuals´ perfect foresight. We
argue that these two mechanisms are grossly unrealistic and that the bulk of the adjustment process occurs
through the impact of conventional monetary policy actions. As a result of it, the main constraint this
mechanism is subject to takes the form of a zero lower bound on short-term nominal interest rates. We
develop a general framework based on a small model for a closed economy without government sector in
which a central bank attempts to hit an inflation target and obtain a number of results.
Publication Year: 2005
Publication Date: 2005-01-01
Language: en
Type: article
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