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Risk Premium Shocks and the Zero Bound on Nominal Interest Rates
Author(s) -
AMANO ROBERT,
SHUKAYEV MALIK
Publication year - 2012
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2012.00541.x
Subject(s) - dynamic stochastic general equilibrium , zero lower bound , economics , nominal interest rate , monetary policy , zero (linguistics) , interest rate , monetary economics , government spending , demand shock , econometrics , real interest rate , macroeconomics , market economy , linguistics , philosophy , welfare
Quantitative dynamic stochastic general equilibrium (DSGE) models often admit that the zero bound on nominal interest rates does not constrain (optimal) monetary policy. Recent economic events, however, have reinforced the relevance of the zero bound. This paper sheds some light on this disconnect by studying a broad range of shocks within a standard DSGE model. In contrast to earlier studies, we find that risk premium shocks are key to building quantitative models where the zero bound is relevant for monetary policy design. Other commonly included shocks, such as productivity, government spending, and money demand shocks, are unable to push nominal rates close to zero.