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Federal Reserve Bank of Boston
Conference Series ; [Proceedings]
Theoretical analysis regarding a zero lower bound on nominal interest rates
Bennett T. McCallum

This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic stabilizing properties of Taylor rules in a ZLB context. The most important argument, however, is that if the short nominal rate is immobilized at zero, there nevertheless exists a route for monetary stabilization policy to be effective--via the foreign exchange market. Its quantitative importance is examined in a calibrated, optimizing, open-economy model.

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Bennett T. McCallum, "Theoretical analysis regarding a zero lower bound on nominal interest rates" , Federal Reserve Bank of Boston, Conference Series ; [Proceedings], pages 870-935, number y:2000:p:870-935, 2000.
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Keywords: Monetary policy ; Inflation (Finance) ; Interest rates ; Foreign exchange market
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