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A0214
Title: Habit persistence and zero lower bound risk under optimal discretionary policy Authors:  Kohei Hasui - Aichi University (Japan) [presenting]
Satoshi Hoshino - Okayama Shoka University (Japan)
Abstract: Previous studies have shown that the risk of nominal interest rates hitting the zero lower bound (ZLB) has profound implications for monetary policy. We show that habit persistence is a non-negligible deep parameter under the optimal discretionary policy when the risk of the ZLB is taken into account. The uncertainty effect, which is defined as a difference between risky steady-state (RSS) and deterministic steady-state (DSS), increases as the habit persistence increases. Under empirically reasonable values of habit persistence, we show that the RSS of the nominal interest rate would reach the ZLB under the optimal discretionary policy. Moreover, the uncertainty effect of the ZLB worsens welfare more as the habit persistence increases.