Discussion Paper

No. 2013-49 | September 18, 2013
Optimal Rules for Central Bank Interest Rates Subject to Zero Lower Bound

Abstract

The celebrated Taylor rule provides a simple formula that aims to capture how the central bank interest rate is adjusted as a linear function of inflation and output gap. However, the rule does not take explicitly into account the zero lower bound on the interest rate. Prior studies on interest rate selection subject to the zero lower bound have not produced rigorous derivations of explicit rules. In this work, Taylor-like rules for central bank interest rates bounded below by zero are derived rigorously using a multi-parametric model predictive control (mpMPC) framework. Rules with or without inertia are included in the derivation. The proposed approach is illustrated through simulations on US economy data. A number of issues for future study are proposed.

JEL Classification

E52 C61

Cite As

Ajay Pratap Singh and Michael Nikolaou (2013). Optimal Rules for Central Bank Interest Rates Subject to Zero Lower Bound. Economics Discussion Papers, No 2013-49, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2013-49

Assessment



Comments and Questions


Anonymous - Referee Report 1
November 04, 2013 - 09:06

see attached file


Ajay Singh - Response to Referee #1
December 04, 2013 - 20:42

Authors' Response to Referee #1


Anonymous - Referee Report 2
November 18, 2013 - 09:18

see attached file


Ajay Singh - Response to Referee #2
December 13, 2013 - 09:40

Author´s Response to Referee #2