tailieunhanh - IMES DISCUSSION PAPER SERIES - INSTITUTE FOR MONETARY AND ECONOMIC STUDIES BANK OF JAPAN

Moreover, the necessity of taking into account monetary policy in the rational expectations framework has been demonstrated in particular by the seminal work of Mankiw and Miron (1986) for the short end of the term structure. For the long part of the term structure, Fuhrer (1996), without specifying any process for the perception of regime shifts by agents, has shown that the expectations hypothesis can be accepted for the long part of the yield curve if we allow some small and discrete changes in the coe¢ cients of the reaction function for the Federal Reserve System. These results conÖrm the relevance of monetary policy for the . term. | IMES DISCUSSION PAPER SERIES The Zero Interest Rate Policy Tomohiro Sugo and Yuki Teranishi Discussion Paper No. 2008-E-20 IMES INSTITUTE FOR MONETARY AND ECONOMIC STUDIES BANK OF JAPAN 2-1-1 NIHONBASHI-HONGOKUCHO CHUO-KU TOKYO 103-8660 JAPAN You can download this and other papers at the IMES Web site http Do not reprint or reproduce without permission. NOTE IMES Discussion Paper Series is circulated in order to stimulate discussion and comments. Views expressed in Discussion Paper Series are those of authors and do not necessarily reflect those of the Bank of Japan or the Institute for Monetary and Economic Studies. IMES Discussion Paper Series 2008-E-20 August 2008 The Zero Interest Rate Policy Tomohiro Sugo and Yuki Teranishi Abstract This paper derives a generalized optimal interest rate rule that is optimal even under a zero lower bound on nominal interest rates in an otherwise basic New Keynesian model with inflation inertia. Using this optimal rule we investigate optimal entrance and exit strategies of the zero interest rate policy ZIP under the realistic model with inflation inertia and a variety of shocks. The simulation results reveal that the timings of the entrance and exit strategies in a ZIP change considerably according to the forward- or backward-lookingness of the economy and the size of the shocks. In particular for large shocks that result in long ZIP periods the time to the start end of the ZIP period is earlier later in an economy with inflation inertia than in a purely forward-looking economy. However these outcomes are surprisingly converse to small shocks that result in short ZIP periods. Keywords Zero Interest Rate Policy Optimal Interest Rate Rule JEL classification E52 E58 Research and Statistics Department Bank of Japan E-mail @ Associate Director Institute for Monetary and Economic Studies Bank of Japan E-mail @ We would like to thank Harald Uhlig Kosuke Aoki and seminar