Quarterly Review 2221

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Zero Nominal Interest Rates: Why They're Good and How to Get Them

Harold L. Cole - Consultant
Narayana Kocherlakota - Consultant

Spring 1998

Abstract
This study shows that in a standard one-sector neoclassical growth model, in which money is introduced with a cash-in-advance constraint, zero nominal interest rates are optimal. Milton Friedman argued in 1969 that zero nominal rates are necessary for efficient resource allocation. This study shows that they are not only necessary but sufficient. The study also characterizes the monetary policies that will implement zero rates. The set of such policies is quite large. The only restriction these policies must satisfy is that asymptotically money shrinks at a rate no greater than the rate of discount.


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