December 2018 issue contents
Taylor-Rule Exit Policies for the Zero Lower Bound

by Siddartha Chattopadhyay^a and Betty C. Daniel^b

Abstract

The monetary authority loses the ability to implement the Taylor rule at the zero lower bound. However, the promise to implement a Taylor rule upon exit remains an effective policy instrument.We show that a Taylor rule, with an optimally chosen exit date and time-varying inflation target, delivers fully optimal policy at the zero lower bound. Additionally, a Taylor rule with only an optimally chosen exit date but a zero inflation target delivers almost all the welfare gains of optimal policy and is simpler to communicate.

JEL Code: E5, E52.

 
Full article (PDF, 53 pages, 902 kb)

^a Indian Institute of Technology Kharagpur
^b University at Albany - SUNY