Risk Aversion and Asymmetries At The Zero Lower Bound
In New Keynesian models, when the nominal interest rate hits the Zero Lower Bound (ZLB), the coefficient of the risk aversion becomes the sole determinant of the relationship between output and inflation expectations. This paper uses a New Keynesian model to show that the risk-aversion plays a crucial role on the impact of macroeconomic shocks −especially when the economy is constrained at the ZLB. Also, the paper shows a substantial asymmetric impact of positive versus negative macroeconomic shocks at the ZLB, given that the Federal Reserve cannot lower nominal interest rate below zero as a response to negative inflation and aggregate demand shocks but it does have more flexibility to respond to positive shocks.
Keyword-New Keynesian Model, Zero Lower Bound, Risk Aversion