Three lessons for monetary policy in a low-inflation era
Abstract: The zero lower bound on nominal interest rates constrains the central bank's ability to stimulate the economy during downturns. We use the FRB/US model to quantify the effects of the zero bound on macroeconomic stabilization and to explore how policy can be designed to minimize these effects. During particularly severe contractions, open-market operations alone may be insufficient to restore equilibrium; some other stimulus is needed. Abstracting from such rare events, if policy follows the Taylor rule and targets a zero-inflation rate, there is a significant increase in the variability of output but not inflation. However, a simple modification to the Taylor rule yields a dramatic reduction in the detrimental effects of the zero bound.
Status: Published in Journal of money, credit and banking, v. 32, no. 4, pt. 2 (November 2000) ; Monetary policy in a low-inflation environment
Provider: Federal Reserve Bank of Boston
Part of Series: Conference Series ; [Proceedings]
Publication Date: 2000