Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation
UC Berkeley, UT Austin and NBER, UC Berkeley and NBER, UC San Diego and NBER
Standard New Keynesian model with Calvo pricing, internal habit formation, risk premium shocks driving ZLB episodes, and regime-switching process for risk premia to generate realistic ZLB duration distributions
intermediate firms: monopolistic competition with Calvo pricing; final firms: perfect competition with Dixit-Stiglitz aggregation
Figure 7 Panel B
Regime-switching model, low end estimate: ZLB duration ~10 quarters, frequency ~6%