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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.
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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

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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.

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