This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s and 1990s, the consequences of the zero bound are negligible for target inflation rates as low as 2 percent. However, the effects of the constraint are non-linear with respect to the inflation target and produce a quantitatively significant deterioration of the performance of the economy with targets between 0 and 1 percent. The variability of output increases significantly and that of inflation also rises somewhat. The stationary distribution of output is distorted with recessions becoming somewhat more frequent and longer lasting. Our model also uncovers that the asymmetry of the policy ineffectiveness induced by the zero bound generates a non-vertical long-run Phillips curve. Output falls increasingly short of potential with lower inflation targets. At zero average inflation, the output loss is in the order of 0.1 percentage points. We also investigate the consequences of the constraint on the analysis of optimal policy based on the inflation-output variability frontier. We demonstrate that in the presence of the zero bound, the variability frontier is distorted as the inflation target approaches zero. As a result comparisons of alternative policy rules that ignore the zero bound can be seriously misleading.

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A number of observers have advocated recently that the Federal Reserve take an "opportunistic " approach to the conduct of monetary policy. A hallmark of this approach is that the central bank focuses on fighting inflation when inflation is high, but focuses on stabilizing output when inflation is low. The implied policy rule is nonlinear. This paper compares the behavior of inflation and output under opportunistic and conventional linear policies. Using stochastic simulations of a small-scale rational expectations model, we study the cost and time required to achieve a given disinflation, as well as the steady-state distributions of inflation and output under the various rules. Keywords: Inflation, monetary policy, interest rates, policy rules. JEL Classification System: E52 The opinions expressed in this paper are the authors', and are not necessarily shared by the members of the Board of Governors of the Federal Reserve System nor by the other members of its staff. We are gratefu...

This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s and 1990s, the consequences of the zero bound are negligible for target inflation rates as low as 2 percent. However, the effects of the constraint are non-linear with respect to the inflation target and produce a quantitatively significant deterioration of the performance of the economy with targets between 0 and 1 percent. The variability of output increases significantly and that of inflation also rises somewhat. Also, we show that the asymmetry of the policy ineffectiveness induced by the zero bound generates a non-vertical long-run Phillips curve. Output falls increasingly short of potential with lower inflation targets.

In this paper we study the role of the exchange rate in conducting monetary policy...

Abstract � In this paper, we present an optimal two-sector growth model involving foreign aid as an input into the production function. We characterize the optimal resources allocation across sectors. Once calibrated, mainly, on Latin American countries, the model exhibits weak substitutability between aid and capital stock. Nonetheless, using numerical simulations, the model reproduces the main stylized facts outlined in the literature.

This paper studies the conditions under which an IT revolution may endogenously occur. To this end, we construct an endogenous growth multisectoral model with a preeminent IT sector. Technological progress is embodied: New softwares can only be run on the the most recent generations of hardware. While the new softwares are copyrighted during a fixed period of time, they become public knowledge at a certain point in time, which generates positive externalities in the rest of the economy. First, we find that our model can give rise to multiple steady states due to strategic complementarities. Then we focus on the dynamic response of the economy to adverse shocks on the level of disembodied technological progress. Substitution effects are shown to arise: The labor resources are diverted from the final goods sector to sustain the creation and production of new softwares. During the IT boom, labor productivity’s growth slowdowns, the skill premium rises as well as the value of firms undertaking research. However, the registered IT boom is always transitory and nothing can be said about the long run sustainability of an IT-driven growth regime.

Thispaperdevelops amulti-sectoralendogenousgrowthmodelin ordertoreproducesomeoftheessentialcharacteristicsoftheso-called

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