Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-18T05:25:06.090Z Has data issue: false hasContentIssue false
  • English
  • Français

INFORMATION VALUE OF THE INTEREST RATE AND THE ZERO LOWER BOUND

Published online by Cambridge University Press:  26 February 2019

Sang Seok Lee
Sang Seok Lee*
Affiliation:
Bilkent University
*
Address correspondence to: Sang Seok Lee, Department of Economics, Bilkent University, 06800 Ankara, Turkey; e-mail: sang.lee@bilkent.edu.tr. Phone: +90 312 290 2370. Fax: +90 312 266 5140.
Get access Rights & Permissions [Opens in a new window]

Abstract

Why is a zero lower bound episode long-lasting and disruptive? This paper proposes the interruption of information flow from the central bank’s interest rate decision to the private sector as a channel by which the destabilizing effect of the zero lower bound constraint on the nominal interest rate is amplified. This mechanism is incorporated into the new Keynesian model by modifying its information structure. This paper shows that the information loss at the zero lower bound can increase (a) the duration of the zero lower bound episodes and (b) the size of deflation and output gap loss. The result in this paper demonstrates that enhanced information sharing by the central bank about the state of the economy can be effective at alleviating the cost of the zero lower bound.

Keywords

Interest Rate Zero Lower BoundAsymmetric InformationForward GuidanceCentral Bank Transparency
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 7 , October 2020 , pp. 1758 - 1784
Copyright
© Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I would like to thank two anonymous reviewers, Guido Ascari, Paul Beaudry, Christopher Bowdler, Martin Ellison, Refet Gürkaynak, Tom Holden, Martina Jančoková, Burçin Kisacikoğlu, Thomas Lubik, Paul Luk, Richard Mash, Eric Mengus, Kubilay Öztürk, Cavit Pakel, Joe Pearlman, Amar Radia, Nicholas Woolley, Francesco Zanetti, and seminar participants at Bilkent, Central Bank of the Republic of Turkey, Oxford, SMYE, and T2M Conference for providing me with helpful comments. I also would like to thank Luca Guerrieri and Matteo Iacoviello for sharing their computer codes with me.

References

Adam, K. and Billi, R. M. (2007) Discretionary monetary policy and the zero lower bound on nominal interest rates. Journal of Monetary Economics 54(3), 728–752.CrossRefGoogle Scholar
Alstadheim, R. (2016) The zero lower bound on the interest rate and a neoclassical Phillips curve. Journal of Macroeconomics 47(PA), 116–130.CrossRefGoogle Scholar
Álvarez, L. J., Dhyne, E., Hoeberichts, M., Kwapil, C., Le Bihan, H., Lünnemann, P., Martins, F., Sabbatini, R., Stahl, H., Vermeulen, P. and Vilmunen, J. (2006) “Sticky prices in the Euro area: A summary of new micro-evidence. Journal of the European Economic Association l4(2–3), 575–584.CrossRefGoogle Scholar
Aruoba, S. B. and Schorfeide, F. (2012) Macroeconomic Dynamics Near the ZLB: A Tale of Two Equilibria. Working Paper.CrossRefGoogle Scholar
Bassetto, M. (2015) Forward Guidance: Communication, Commitment, or Both? Society for Economic Dynamics, 2015 Meeting Papers: No. 216.Google Scholar
Basu, S. and Bundick, B. (2015) Endogenous Volatility at the Zero Lower Bound: Implications for Stabilization Policy. Federal Reserve Bank of Kansas City, Research Working Paper RWP: No. 15–1.CrossRefGoogle Scholar
Bauducco, S. and Caputo, R. (2018) Wicksellian rules and the Taylor principle: Some practical implications. The Scandinavian Journal of Economics, first published on 03 October 2018.Google Scholar
Belgibayeva, A. and Horvath, M. (2017) Real rigidities and optimal stabilization at the zero lower bound in new Keynesian economies. Macroeconomic Dynamics, first published on 22 June 2017.Google Scholar
Bianchi, F. and Melosi, L. (2017) Escaping the great recession. American Economic Review 107(4), 1030–1058.CrossRefGoogle Scholar
Billi, R. M. (2017) A note on nominal GDP targeting and the zero lower bound. Macroeconomic Dynamics 21(08), 2138–2157.CrossRefGoogle Scholar
Blinder, A. S. (1998) Central Banking in Theory and Practice. Cambridge, MA: MIT Press.Google Scholar
Blinder, A. S., Ehrmann, M., Fratzscher, M., De Haan, J. and Jansen, D. (2008) Central bank communication and monetary policy: A survey of theory and evidence. Journal of Economic Literature 46(4), 910–945.CrossRefGoogle Scholar
Bloom, N. (2014) Fluctuations in uncertainty. Journal of Economic Perspectives 28(2), 153–176.CrossRefGoogle Scholar
Bodenstein, M., Erceg, C. J. and Guerrieri, L. (2009) The Effects of Foreign Shocks When Interest Rates are at Zero. Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers: No. 983.Google Scholar
Calvo, G. A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12(3), 383–398.CrossRefGoogle Scholar
Cameron, A. C. and Trivedi, P. K. (2005) Microeconometrics: Methods and Applications. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Campbell, J. R., Evans, C. L., Fisher, J. D. M. and Justiniano, A. (2012) Macroeconomic effects of federal reserve forward guidance. Brookings Papers on Economic Activity 44(1), 1–80.CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. and Rebelo, S. (2011) When is the government spending multiplier large? Journal of Political Economy 119(1), 78–121.CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. and Trabandt, M. (2015) Understanding the great recession. American Economic Journal: Macroeconomics 7(1), 110–167.Google Scholar
Clarida, R., Galí, J. and Gertler, M. (1999) The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature 37(4), 1661–1707, December.CrossRefGoogle Scholar
Crawford, V. P. and Sobel, J. (1982) Strategic information transmission. Econometrica 50(6), 1431–1451.CrossRefGoogle Scholar
Cukierman, A. (2009) The limits of transparency. Economic Notes, Banca Monte dei Paschi di Siena SpA 38(1-2), 1–37.Google Scholar
den Haan, W. (2013) Introduction. In: den Haan, W. (ed.), Forward Guidance: Perspectives from Central Bankers, Scholars, and Market Participants, A Vox-Eu.org eBook, Centre for Economic Policy Research. CEPR publication.Google Scholar
Eggertsson, G. B. and Woodford, M. (2003) The zero bound on interest rates and optimal monetary policy. Brookings Papers on Economic Activity 34(1), 139–235.CrossRefGoogle Scholar
Fernández-Villaverde, J., Gordon, G., Guerrón-Quintana, P. and Rubio-Ramírez, J. F. (2015) Nonlinear adventures at the zero lower bound. Journal of Economic Dynamics and Control 57(C), 182–204.CrossRefGoogle Scholar
Flotho, S. (2015) Fiscal multipliers in a monetary union under the zero–lower–bound constraint. Macroeconomic Dynamics 19(06), 1171–1194.CrossRefGoogle Scholar
Galí, J. (2008) Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework. Princeton, NJ: The Princeton University Press.Google Scholar
Gosselin, P., Lotz, A. and Wyplosz, C. (2009) Interest rate signals and central bank transparency. NBER Chapters, In: NBER International Seminar on Macroeconomics 2007, National Bureau of Economic Research, Inc., pp. 9–51. NBER publication.Google Scholar
Guerrieri, L. and Iacoviello, M. (2015) OccBin: A toolkit for solving dynamic models with occasionally binding constraints easily. Journal of Monetary Economics 70(c), 22–38.CrossRefGoogle Scholar
Gürkaynak, R. S., Sack, B. and Swanson, E. (2005) Do actions speak louder than words? The response of asset prices to monetary policy actions and statements. International Journal of Central Banking 1(1), 55–93.Google Scholar
Hernandez-Murillo, R. and Shell, H. (2014) The rising complexity of the FOMC statement, ” Economic Synopses, Federal Reserve Bank of St. Louis, issue 23.Google Scholar
Holden, T. and Paetz, M. (2012) Efficient Simulation of DSGE Models with Inequality Constraints. School of Economics Discussion Papers: No. 1612, School of Economics, University of Surrey.Google Scholar
Hubert, P. (2015) Do central bank forecasts influence private agents? Forecasting performance vs. signals. Journal of Money, Credit, and Banking 47(4), 771–789.CrossRefGoogle Scholar
Judd, K. L., Maliar, L. and Maliar, S. (2011) A Cluster-Grid Projection Method: Solving Problems with High Dimensionality. Working Paper.CrossRefGoogle Scholar
Jung, T., Teranishi, Y. and Watanabe, T. (2005) Optimal monetary policy at the zero-interest-rate bound. Journal of Money, Credit, and Banking 37(5), 813–835.CrossRefGoogle Scholar
Jurado, K., Ludvigson, S. C. and Ng, S. (2015) Measuring uncertainty. American Economic Review 105(3), 1177–1216.CrossRefGoogle Scholar
Kuttner, K. N. (2001) Monetary policy surprises and interest rates: Evidence from the Fed funds futures market. Journal of Monetary Economics 47(3), 523–544.CrossRefGoogle Scholar
Nakata, T. (2017) Uncertainty at the zero lower bound. American Economic Journal: Macroeconomics 9(3), 186–221.Google Scholar
Nakov, A. (2008) Optimal and simple monetary policy rules with zero floor on the nominal interest rate. International Journal of Central Banking 4(2), 73–127.Google Scholar
Ngo, P. (2018) The risk of hitting the zero lower bound and the optimal inflation target. Macroeconomic Dynamics 22(02), 402–425.CrossRefGoogle Scholar
Pearlman, J., Currie, D. and Levine, P. (1986) Rational expectations models with partial information. Economic Modelling 3(2), 90–105.CrossRefGoogle Scholar
Peek, J., Rosengren, E. S. and Tootell, G. M. B. (1999) Is bank supervision central to central banking? The Quarterly Journal of Economics 114(2), 629–653.CrossRefGoogle Scholar
Romer, D. H. and Romer, C. D. (2000) Federal reserve information and the behavior of interest rates. American Economic Review 90(3), 429–457.CrossRefGoogle Scholar
Rudebusch, G. D. and Williams, J. C. (2008) Revealing the secrets of the temple: The value of publishing central bank interest rate projections. NBER Chapters, In: Asset Prices and Monetary Policy, National Bureau of Economic Research, Inc., pp. 247–289. NBER publication.CrossRefGoogle Scholar
Sargent, T. J. (2001) The Conquest of American Inflation. Princeton, NJ: Princeton University Press.Google Scholar
Sims, C. A. (2002) The role of models and probabilities in the monetary policy process. Brookings Papers on Economic Activity 33(2), 1–62.CrossRefGoogle Scholar
Walsh, C. E. (2003) Monetary Theory and Policy, 2nd ed. Cambridge, MA: MIT Press Books, MIT Press.Google Scholar
Werning, I. (2012) Managing a Liquidity Trap: Monetary and Fiscal Policy. MIT, Working Paper.CrossRefGoogle Scholar
Williams, J. C. (2014) Monetary policy at the zero lower bound: Putting theory into practice. Hutchins Center on Fiscal and Monetary Policy at Brookings.Google Scholar
Woodford, M. (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: The Princeton University Press.Google Scholar
Woodford, M. (2005) Central bank communication and policy effectiveness. In: Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pp. 399–474.Google Scholar
Woodford, M. (2011) Simple analytics of the government expenditure multiplier. American Economic Journal: Macroeconomics 3(1), 1–35.Google Scholar
Wu, J. C. and Xia, F. D. (2016) Measuring the macroeconomic impact of monetary policy at the zero lower bound. Journal of Money, Credit and Banking 48(2–3), 253–291.CrossRefGoogle Scholar
Supplementary material: PDF

Lee supplementary material

Lee supplementary material
Download Lee supplementary material(PDF)
PDF 549.8 KB