Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If you need an accessible version of this item please contact JSTOR User Support

Heeding Daedalus: Optimal Inflation and the Zero Lower Bound

JOHN C. WILLIAMS
Brookings Papers on Economic Activity
Vol. 2009 (FALL 2009), pp. 1-37
Stable URL: http://www.jstor.org/stable/25652727
Page Count: 37
  • Read Online (Free)
  • Download ($19.00)
  • Subscribe ($19.50)
  • Cite this Item
If you need an accessible version of this item please contact JSTOR User Support
Heeding Daedalus: Optimal Inflation and the Zero Lower Bound
Preview not available

Abstract

This paper reexamines the implications for monetary policy of the zero lower bound on nominal interest rates in light of recent experience. The ZLB contributed little to the sharp output declines in many economies in 2008, but it is a significant factor slowing recovery. Model simulations imply that an additional 4 percentage points of rate cuts would have limited the rise in the U.S. unemployment rate and would bring unemployment and inflation more quickly to steady-state values, but the ZLB precludes these actions, at a cost of $1.8 trillion in forgone U.S. output over four years. If recent events presage a shift to a significantly more adverse macroeconomic climate, then 2 percent steady-state inflation may provide an inadequate buffer against the ZLB, assuming a standard Taylor rule. Stronger countercyclical fiscal policy or alternative monetary policy strategies could mitigate the ZLB's effects, but even with such policies an inflation target of 1 percent or lower could entail significant costs.

Page Thumbnails

  • Thumbnail: Page 
1
    1
  • Thumbnail: Page 
2
    2
  • Thumbnail: Page 
3
    3
  • Thumbnail: Page 
4
    4
  • Thumbnail: Page 
5
    5
  • Thumbnail: Page 
6
    6
  • Thumbnail: Page 
7
    7
  • Thumbnail: Page 
8
    8
  • Thumbnail: Page 
9
    9
  • Thumbnail: Page 
10
    10
  • Thumbnail: Page 
11
    11
  • Thumbnail: Page 
12
    12
  • Thumbnail: Page 
13
    13
  • Thumbnail: Page 
14
    14
  • Thumbnail: Page 
15
    15
  • Thumbnail: Page 
16
    16
  • Thumbnail: Page 
17
    17
  • Thumbnail: Page 
18
    18
  • Thumbnail: Page 
19
    19
  • Thumbnail: Page 
20
    20
  • Thumbnail: Page 
21
    21
  • Thumbnail: Page 
22
    22
  • Thumbnail: Page 
23
    23
  • Thumbnail: Page 
24
    24
  • Thumbnail: Page 
25
    25
  • Thumbnail: Page 
26
    26
  • Thumbnail: Page 
27
    27
  • Thumbnail: Page 
28
    28
  • Thumbnail: Page 
29
    29
  • Thumbnail: Page 
30
    30
  • Thumbnail: Page 
31
    31
  • Thumbnail: Page 
32
    32
  • Thumbnail: Page 
33
    33
  • Thumbnail: Page 
34
    34
  • Thumbnail: Page 
35
    35
  • Thumbnail: Page 
36
    36
  • Thumbnail: Page 
37
    37