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The Frobenius-Perron dimension for an abelian category was recently introduced. We apply this theory to the category of representations of the finite-dimensional radical squared zero algebras associated to certain modified ADE graphs. In particular, we take an ADE quiver with arrows in a certain orientation and an arbitrary number of loops at each vertex. We show that the Frobenius-Perron dimension of this category is equal to the maximum number of loops at a vertex. Along the way, we introduce a result which can be applied in general to calculate the Frobenius-Perron dimension of a radical square zero bound quiver algebra. We use this result to introduce a family of abelian categories which produce arbitrarily large irrational Frobenius-Perron dimensions., Comment: typos corrected

In the early 2000s, a small group of economists at Princeton University revived the debate over liquidity traps and developed a framework for monetary policy at the zero lower bound. Paul Krugman’s 1998 Brookings paper provides the basic model that underlies much of the new view, but work by Ben Bernanke, Michael Woodford, Gauti Eggertsson, and Lars Svensson also played an important role in reshaping our view of stabilization policy at the zero bound. By the late 2010s, their ideas had begun to influence policy at the Federal Reserve. Research by Krugman and other Princeton School members provided the rationale for the Fed’s new policy of flexible average inflation targeting, which is the most important shift in the Fed’s policy regime in several decades. Comparing the Princeton School to other recent developments such as market monetarism and NeoFisherism helps to illuminate both sets of ideas.

We highlight an overlooked source of equilibrium multiplicity in monetary economies subject to a zero bound on nominal interest rates. In environments with sufficient endogenous propagation, depressed contemporary economic conditions must directly lower expectations of future output and inflation. A current recession followed by gradual convergence back to steady state may then be an equilibrium outcome, without any exogenous impulse. We present this mechanism heuristically in partial equilibrium, and in two computed examples of New Keynesian economies. Expansionary fiscal policy makes the recessionary equilibrium more severe at the margin, but commitment to a sufficiently large expansion can rule out multiplicity.

When the monetary policy rate is at the zero bound, “threshold-based forward guidance” (TBFG) is a state-contingent promise to delay liftoff from the zero bound until macroeconomic variables breach particular “thresholds”. We study TBFG within a stochastic version of the workhorse New Keynesian model. We show that TBFG can be used to provide temporary stimulus, while also limiting the time inconsistency of policy promises. Existence of a unique equilibrium requires the policymaker to specify how the thresholds should be interpreted, as well as their values. With an appropriate choice of thresholds, TBFG outperforms forward guidance based purely on calendar time and substantially reduces welfare losses compared to the optimal time-consistent policy.

The long period of quiet inflation at near zero interest rates, with large quantitative easing, suggests that core monetary doctrines are wrong. It suggests that inflation can be stable and determi...

We examine the transmission mechanism of monetary policy to inflation markets. We decompose monetary policy shocks in the United States into two orthogonal channels: the policy channel, measured by the change in 2-year nominal Treasury yield, and the communication channel, measured by the orthogonal change in 10-year nominal Treasury yield. We find that the conventional monetary policy affects long-term market-based inflation compensation through the communication channel, while the unconventional monetary policy affects short-term market-based inflation compensation through the policy channel. Our analysis also indicates that an announcement of quantitative easing corrects the short-term mispricing between the two inflation compensation measures, but amplifies long-term mispricing.

This paper gives money a role in providing cheap collateral in a model of banking; this means that, besides the Taylor Rule, monetary policy can affect the risk-premium on bank lending to firms by varying the supply of M0 in open market operations, so that even when the zero bound prevails monetary policy is still effective; and fiscal policy under the zero bound still crowds out investment via the risk-premium. A simple rule for making M0 respond to credit conditions can substantially enhance the economy's stability. Both price-level and nominal GDP targeting rules for interest rates would combine with this to stabilise the economy further. With these rules for monetary control, aggressive and distortionary regulation of banks' balance sheets becomes redundant.

Is it ethical to pay patients for selecting cheaper medical treatments? The healthcare system in the United States is notoriously profligate, at least in part because when insurers foot the bill, patients have little incentive to avoid wasteful treatments. One familiar means for dealing with this problem is for insurers to offer reduced co-pays to patients who select cheaper treatments. Would it be ethical to take this one step further, beyond the zero bound, sharing the savings of cheaper treatments by positively paying the patients who select them? Schmidt & Emanuel recently proposed this policy of 'Inclusive Shared Savings' (ISS). This article examines various ethical objections to the idea.

We define the entropic bounds, i.e minimal uncertainty for pairs of unitary testers in distinguishing between unitary transformations not unlike the well known entropic bounds for observables. We show that in the case of specific sets of testers which pairwise saturate the trivial zero bound, the testers are all equivalent in the sense their statistics are the same. On the other hand, when maximal bounds are saturated by such sets of testers, the unitary operators would form unitary bases which are mutually unbiased. This resembles very much the role of mutually unbiased bases in maximizing the entropic bounds for observables. We show how such a bound can be useful in certain quantum cryptographic protocols., Comment: Added a more comprehensive background on testers and included some minor changes on notation

From 2000 to 2003, when Ben Bernanke was a professor and then a Fed Governor, he wrote extensively about monetary policy at the zero bound on interest rates. He advocated aggressive stimulus policies, such as a money-financed tax cut and an inflation target of 3-4%. Yet, since U.S. interest rates hit zero in 2008, the Fed under Chairman Bernanke has taken more cautious actions. This paper asks when and why Bernanke changed his mind about zero-bound policy. The answer, at one level, is that he was influenced by analysis from the Fed staff that was presented at the FOMC meeting of June 2003. This answer raises another question: why did the staff's views influence Bernanke so strongly? I seek answers to this question in the social psychology literature on group decision-making.

The Federal Reserve’s unconventional monetary policy announcements in 2008–2009 substantially reduced international long-term bond yields and the spot value of the dollar. These changes closely followed announcements and were very unlikely to have occurred by chance. A simple portfolio choice model can produce quantitatively plausible changes in U.S. and foreign excess bond yields. The jump depreciations of the USD are fairly consistent with estimates of the impacts of previous equivalent monetary policy shocks. The policy announcements do not appear to have reduced yields by reducing expectations of real growth. Unconventional policy can reduce international long-term yields and the value of the dollar even at the zero bound.

The financial crisis of 2008 has exploded the government debt levels and brought fiscal policy to the forefront of policy debates. The environment of interest rate close to zero bound, with the tum...

Low interest rates in the United States have recently been accompanied by large fiscal stimulus. However, previous discussions of monetary policy did not anticipate this fiscal activism, leading to over-estimates of the costs of the zero lower bound and, hence, of the appropriate inflation target. To rectify this, I include counter-cyclical fiscal policy within a large-scale model of the US economy and find that it stabilizes activity at low interest rates. If fiscal policy behaves as it has recently, then the inflation target can remain near its pre-crisis level, despite increased volatility of macroeconomic shocks.

We investigate how the Federal Reserve (Fed) hit the zero lower bound (ZLB) interest rate while operating under a Taylor-type policy rule. We estimate a reaction function, and the results indicate that during the crisis Fed increased the weight on output without also increasing the weight on inflation which led them to hit the ZLB.0

We explore whether the ECB’s interest rate setting behaviour changed during the financial crisis by estimating reaction functions over the period 1999–2010, allowing for a smooth transition from one set of parameters to another. The estimates show a swift change in the months following the collapse of Lehman brothers. The ECB appears to have cut rates more aggressively than expected solely on the basis of the worsening of macroeconomic conditions, consistent with the theoretical literature on optimal monetary policy in the vicinity of the zero bound.

When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that, in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to low interest rates.

In years after the financial crisis economists started to propose negative interest rates as away how to escape from a liquidity trap. Negative interest rate was considered to be impossible butfew countries have already set them below the lower zero bound. However, it has been done onlyin the central banks but not in the commercial banks. The main thesis of this paper is that lowinterest rates can inflate a housing bubble and as a result negative interest rates would only inflateit more. First, proposals how to make interest rate negative even in commercial banking arepresented in the paper. Then we discuss general consequences of negative interest rates such asredistribution, initiation of a business cycle and most importantly, inflation. Finally, we look at thehousing market and present theoretical and some empirical evidence of a possible ongoing bubble.The theory suggests that the negative interest rate would inflate the bubble necessarily.Consequences of a later decrease of housing prices have to be taken into account whenevernegative interest rates are proposed.

I study the long run determinacy tradeoff - recurrent episodes of passive monetary policy are (in)determinate if their expected duration is long (brief ) - when passive pol- icy is at the zero bound. On-going regime change implies qualitatively different shock transmission from the standard New Keynesian model. For U.S. baseline parameter values, I find temporary fiscal stimulus is effective, while adverse supply shocks can be expansionary if the central bank's active policy stance is weak and/or if the liquidity trap's average duration exceeds 3 quarters.

There appears to be a disconnect between the importance of the zero bound on nominal interest rates in the real-world and predictions from quantitative DSGE models. Recent economic events have reinforced the relevance of the zero bound for monetary policy whereas quantitative models suggest that the zero bound does not constrain (optimal) monetary policy.

This article investigates the impact of domestic monetary policy rate announcements on the stock markets of New Zealand, Australia, the United Kingdom and the euro area, using event-study methods to identify stock price reactions to the unanticipated/surprise component of announcements. As Australia and New Zealand did not reach the zero bound we investigate whether there is an impact from the global financial crisis on stock market reactions that can be distinguished from the asymmetric reactions to surprises that characterise the business cycle. We find that the euro area and the UK both show a financial crisis effect but behaviour in New Zealand and Australia does not change. We conduct robustness checks and explore confounding factors, especially the impact of ‘guidance’ from central banks that prepares markets for policy rate changes.

When tracking inherently non-normal processes such as zero-bound process variables that tend to exhibit multiplicative rather than additive error variation, the options for process monitoring and capability estimation are limited. A process capability i..

We use simulations of the Federal Reserve's FRB/US model to examine the efficacy of a number of proposals for reducing the consequences of the zero bound on nominal interest rates. Among the proposals are: a more aggressive monetary policy; promises to make up any shortfall in monetary ease during the zero-bound period by keeping interest rates lower in the future; and the adoption of a price-level target. We consider two assumptions about expectations formation. One assumption is fully model-consistent expectations (MCE)—a reasonable assumption when a policy has been in place for some time, but perhaps less so for a newly announced policy. We therefore also consider the possibility that only financial markets have MCE, and that other agents form their expectations using a small-scale VAR model estimated using historical data. All of the policies noted above are highly effective at reducing the adverse effects of the zero bound under MCE, but their efficacy drops considerably when households and firms base their expectations on the historical average behavior of the economy, and only investors fully recognize the economic implications of the various proposals. J. Japanese Int. Economies 20 (3) (2006) 314–337.

We use simulations of the Federal Reserve's FRB/US model to examine the efficacy of a number of proposals for reducing the consequences of the zero bound on nominal interest rates. Among the proposals are: a more aggressive monetary policy; promises to make up any shortfall in monetary ease during the zero-bound period by keeping interest rates lower in the future; and the adoption of a price-level target. We consider two assumptions about expectations formation. One assumption is fully model-consistent expectations (MCE)--a reasonable assumption when a policy has been in place for some time, but perhaps less so for a newly announced policy. We therefore also consider the possibility that only financial markets have MCE, and that other agents form their expectations using a small-scale VAR model estimated using historical data. All of the policies noted above are highly effective at reducing the adverse effects of the zero bound under MCE, but their efficacy drops considerably when households and firms base their expectations on the historical average behavior of the economy, and only investors fully recognize the economic implications of the various proposals.

This paper reviews the literature on what the zero bound to nominal interest rates implies for the conduct of monetary policy. The aim is to evaluate the risks of hitting the zero bound; and to evaluate policies that are said to be able to reduce that risk, or policies that are proposed as means of helping the economy escape if it is in a zero bound 'trap'. I conclude that policies aimed at 'cure' are arguably more uncertain tools than those aimed at 'prevention', so prevention is a less risky strategy for policymakers. But since the risks of hitting the zero bound seem quite small anyway, and the risks of encountering a deflationary spiral smaller still, it is conceivable that inflation objectives that typify modern monetary regimes already have more than enough insurance built into them to deal with the zero bound problem.

Despite advances in transactions technologies, paper currency still constitutes a notable percentage of the money supply in most countries. For example, it constitutes roughly 10% of the US Federal Reserve's main monetary aggregate, M2. Yet, it has important drawbacks. First, it can help facilitate activity in the underground (tax-evading) and illegal economy. Second, its existence creates the artifact of the zero bound on the nominal interest rate. On the other hand, the enduring popularity of paper currency generates many benefits, including substantial seigniorage revenue. This paper explores some of the issues associated with phasing out paper currency, especially large-denomination notes.

This paper gives money a role in providing cheap collateral in a model of banking; besides the Taylor Rule, monetary policy can affect the risk-premium on bank lending to firms by varying the supply of M0, so at the zero bound monetary policy is effective; fiscal policy crowds out investment via the risk-premium. A rule for making M0 respond to credit conditions can enhance the economy's stability. Both price-level and nominal GDP targeting rules for interest rates combined with this stabilise the economy further. With these rules for monetary control, aggressive and distortionary regulation of banks' balance sheets becomes redundant.

This paper presents a regime-switching model of the yield curve with two states: a normal state and a zero-bound state for the case when the monetary policy target rate is stuck at the nominal zero bound, as the U.S. economy has been since December 2008. The model delivers estimates of the time-varying probability of exiting the zero-bound state and can be applied to generate outcome-contingent forecasts useful for portfolio stress tests. The results show that the probability of remaining in the zero-bound state has trended upward since 2009, with notable upticks following Federal Reserve decisions to provide further monetary stimulus, whether through asset purchases or forward guidance.

In the wake of the financial crisis of 2007-8 academic as well as non-academic interest in the economic thought of John Maynard Keynes was revived. The notion of a 'liquidity trap', interpreted as a zero bound of the (short-term) nominal rate of interest, is seen as one of Keynes's important and lasting contributions to economic theory and to the understanding of the potential problems of monetary policy.2 This view of the alleged connection between Keynes, the 'liquidity trap' and the zero bound of the rate of interest is especially prominent in the macroeconomic textbook of Olivier J. Blanchard (2009).3 Unfortunately, the account given there of a supposed connection between Keynes's analysis in his General Theory of Employment, Interest and Money and the zero bound of the rate of interest proves to be unsustainable. In what follows, it will be shown that Keynes did not invent the term 'liquidity trap', that he discussed an effective floor to the (long-term) rate of interest at a positive level and that the zero bound of the (short-term) rate of interest was well known to British economists before the publication of Keynes's General Theory of Employment, Interest and Money.

This paper studies optimal policy in a stylised New Keynesian model that is extended to incorporate imperfect substitutability between short-term and long-term bonds. This simple modification provides a channel through which asset purchases by the policy maker can affect aggregate demand. Because assets are imperfect substitutes, central bank asset purchases that alter the relative supplies of assets can influence their prices. In the model, aggregate demand depends on the prices (or interest rates) of both long-term and short-term bonds. To the extent that central bank asset purchases reduce long-term interest rates (over and above the effect of expected future short rates), aggregate demand can be stimulated, leading to higher inflation through a standard New Keynesian Phillips Curve. However, the imperfect substitutability between bonds that gives asset purchases their traction also reduces the potency of conventional monetary policy because reductions in the short-term nominal interest rate reduce the relative supply of short-term bonds, increasing the premium on long-term bonds. Nevertheless, a policy in which the policymaker uses asset purchases as an additional policy instrument can improve outcomes in the face of a negative demand shock that drives the short-term policy rate to its lower bound. This is true even if asset purchases policies are also subject to (both upper and lower) bounds.

This paper applies a yield curve model that separates expectations and volatility components of market yields on default-free bonds. Expected future riskless rates derived from the model are unbiased, reasonably accurate indicators of subsequent actual riskless rates for periods up to three years. Variances between Fed Funds and expectations of future riskless rates derived from the model correspond with incidences of tight money and easy money in the past and are reflected in subsequent inflation rates three years out. Ex-post inflation forecasts based upon these variances have accuracy within the range of alternative forecasts. Given this direct relationship with future inflation, expectations of future riskless rates may be useful as an indicator or policy target for inflation-targeting monetary policy. For this purpose, robust “headline” inflation measures produce the strongest relationship and may be more useful than “core” measures. Difficulties stimulating the Japanese economy and, recently, the U.S. and other economies might arise from limits on the magnitude of potential monetary stimulus when yield expectations are at extremely low levels and policy rates are zero bound.