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IMF Economic Review

, Volume 65, Issue 1, pp 37–70 | Cite as

Monetary Policy, Incomplete Information, and the Zero Lower Bound

  • Christopher Gust
  • Benjamin K. Johannsen
  • J. David López-Salido
Article

Abstract

In the context of a stylized New Keynesian model, we explore the interaction between imperfect knowledge about the state of the economy and the zero lower bound. We show that optimal policy under discretion near the zero lower bound responds to signals about an increase in the equilibrium real interest rate by less than it would when far from the zero lower bound. In addition, we show that Taylor-type rules that either include a time-varying intercept that moves with perceived changes in the equilibrium real rate or respond aggressively to deviations of inflation and output from their target levels perform similarly to optimal discretionary policy. Our analysis of first-difference rules highlights that rules with interest rate smoothing terms carry forward current and past misperceptions about the state of the economy and can lead to suboptimal performance.

JEL

E32 E52 

Supplementary material

41308_2016_23_MOESM1_ESM.zip (1.5 mb)
Electronic supplementary material 1 (zip 1496 kb)

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Copyright information

© International Monetary Fund 2017

Authors and Affiliations

  • Christopher Gust
    • 1
  • Benjamin K. Johannsen
    • 1
  • J. David López-Salido
    • 1
  1. 1.Board of Governors of the Federal Reserve SystemWashingtonUSA

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