Monetary Policy Strategies for a Low-Rate Environment
- 1 May 2019
- journal article
- Published by American Economic Association in AEA Papers and Proceedings
- Vol. 109, 421-426
Abstract
In low-rate environments, policy strategies that involve holding rates “lower for longer” (L4L) may mitigate the effects of the effective lower bound (ELB). However, these strategies work in part by managing the public's expectations, which is not always realistic. Using the Fed's large-scale macroeconometric model, we study the effectiveness of L4L policies when financial market participants are forward-looking but other agents are not. We find that the resulting limited ability to manage expectations reduces but does not eliminate the advantages of L4L policies. The best policies provide adequate stimulus at the ELB while avoiding sizable overshoots of inflation and output.Keywords
All Related Versions
This publication has 5 references indexed in Scilit:
- Monetary Policy in a Low Interest Rate WorldBrookings Papers on Economic Activity, 2017
- Expectations formation and the effectiveness of strategies for limiting the consequences of the zero boundJournal of the Japanese and International Economies, 2006
- Zero Bound on Interest Rates and Optimal Monetary PolicyBrookings Papers on Economic Activity, 2003
- Three Lessons for Monetary Policy in a Low-Inflation EraJournal of Money, Credit and Banking, 2000
- A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistenceCarnegie-Rochester Conference Series on Public Policy, 1993