Question: 1. Optimal monetary policy at the zero lower bound under discretion. Consider the standard New Keynesian model with a zero lower bound constraint D =

1. Optimal monetary policy at the zero lower bound under discretion. Consider the standard New Keynesian model with a zero lower bound constraint D = Etrt-0-(it - Eint+1 - it) = BETit1 + Kit it = max [0, r + dont + dart] Assume that t follows a two state Markov process 1 -6 6 P = 0 1 where 0 0 in the high state. (a) Show that when we are in the high state such that re = ry it must be the case that It = 0, at = 0, and it = TH

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