http://www.bis.org/cbhub/list/author/author_5618/index.rss Research hub papers by author James Hebden en http://www.federalreserve.gov/pubs/ifdp/2010/1001/ifdp1001.pdf Board of Governors of the Federal Reserve System International Financial Discussion Papers by Martin Bodenstein, James Hebden, and Ricardo Nunes Imperfect Credibility and the Zero Lower Bound on the Nominal Interest Rate 2010-07-19T12:43:00Z Martin Bodenstein, James Hebden, and Ricardo Nunes. When the nominal interest rate reaches its zero lower bound, credibility is crucial for conducting forward guidance. We determine optimal policy in a New Keynesian model when the central bank has imperfect credibility and cannot set the nominal interest rate below zero. In our model, an announcement of a low interest rate for an extended period does not necessarily reflect high credibility. Even if the central bank does not face a temptation to act discretionarily in the current period, policy commitments should not be postponed. In reality, central banks are often reluctant to allow a recovery path with output and inflation temporarily above target. From the perspective of our model such a policy reflects a low degree of credibility. We find increased forecast uncertainty in inflation and the output gap at the zero lower bound while interest rate uncertainty is reduced. Furthermore, misalignments between announced interest rate paths and market expectations are found to be best explained by lack of credibility. Imperfect Credibility and the Zero Lower Bound on the Nominal Interest Rate 2010-07-19T12:43:00Z Abstract http://www.federalreserve.gov/pubs/ifdp/2010/1001/default.htm Full text http://www.federalreserve.gov/pubs/ifdp/2010/1001/ifdp1001.pdf James Hebden Martin Bodenstein Ricardo Nunes Martin Bodenstein, James Hebden, and Ricardo Nunes 2010-07-14 Board of Governors of the Federal Reserve System International Financial Discussion Papers C61 E31 E52