Norges Bank

Working Paper

The zero lower bound on the interest rate and a Neo-Classical Phillips curve

Author:
By Ragna Alstadheim
Series:
Working Paper
Number:
13/2010

Abstract:

With sticky prices, optimizing agents and money in the utility function, I derive the exact analytical solution for optimal monetary policy given a zero lower bound (ZLB) on the interest rate. The Phillips curve is Neo-Classical, and the ZLB is then not a constraint on optimal policy. Optimal policy is history dependent even without a commitment problem and implements a Friedman rule equilibrium. The role of forward guidance in policy is more limited than under a New-Keynesian Phillips curve. The optimal policy rule intercept term is time varying and depends on the variance of the natural real rate.

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ISSN 1502-8190 (online)

Published 27 July 2010 09:26
Edited 10 August 2010 13:09
Published 27 July 2010 09:26
Edited 10 August 2010 13:09