Strengthening the FOMC’s Framework in View of the Effective Lower Bound and Some Considerations Related to Time-Inconsistent Strategies

Duarte, Fernando M.; Johannsen, Benjamin K.; Melosi, Leonardo; Nakata, Taisuke

doi:10.17016/FEDS.2020.067

Working Paper

Strengthening the FOMC’s Framework in View of the Effective Lower Bound and Some Considerations Related to Time-Inconsistent Strategies

Abstract: We analyze the framework for monetary policy in view of the effective lower bound (ELB). We find that the ELB is likely to bind in most future recessions and propose some ways that theoretical models imply that the framework could be strengthened. We also discuss ways that commitment strategies, which are not part of the framework, may improve economic outcomes. These policies can suffer from a time-inconsistency problem, which we analyze.

Keywords: Monetary policy; Effective lower bound; Forward guidance; Balance sheet policies; Commitment policies; Time inconsistency;

JEL Classification: E31; E32; E52; E58;

https://doi.org/10.17016/FEDS.2020.067