Monetary Policy Strategies for a Low-Rate Environment
AEA Papers and Proceedings
vol. 109,
May 2019
(pp. 421-26)
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.Citation
Bernanke, Ben S., Michael T. Kiley, and John M. Roberts. 2019. "Monetary Policy Strategies for a Low-Rate Environment." AEA Papers and Proceedings, 109: 421-26. DOI: 10.1257/pandp.20191082Additional Materials
JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E58 Central Banks and Their Policies