INFORMATION VALUE OF THE INTEREST RATE AND THE ZERO LOWER BOUND. (26th October 2020)

• Record Type: Journal Article
• Authors: Lee, Sang Seok
• Is Part Of: Macroeconomic dynamics. Volume 24:Number 7(2020)
• Page Start: 1758
• Page End: 1784
• Publication Date: 2020-10-26
• Subjects: Interest Rate Zero Lower Bound, -- Asymmetric Information, -- Forward Guidance, -- Central Bank Transparency; Macroeconomics -- Periodicals; 339.05
• DOI: 10.1017/S1365100518001037
• Languages: English
• ISSNs: 1365-1005

Abstract

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.