The Zero-Bound, Low Inflation, and Output Collapse," Working paper

I consider the example analyzed in Eggertsson and Woodford (2003a,b), which shows that the zero lower bound on the nominal rate of interest, in conjunction with a low-inflation policy by the central bank, can cause output to collapse in response to certain shocks. I present evidence which suggests that when capital is introduced into the model, the problem is less likely to occur. This analysis is carried out for the case when shocks are to the rate at which households discount future consumption. Additional analysis with other shocks (especially shocks to investment) and a wider range of economic frictions is of interest.