The Stochastic Lower Bound

Abstract

Since the Great Recession policy rates have been extremely low, but neither absolutely constant, nor exactly set to zero. We thus augment a standard Zero Lower Bound (ZLB) model to study the effects of a Stochastic Lower Bound (SLB) on policy rates. We find that a less predictable SLB reduces the deflationary effects of negative demand shocks by lowering expectations of future values of the SLB at times when interest-rate cuts are not an option.