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Federal Reserve Bank of Boston
Conference Series ; [Proceedings]
Three lessons for monetary policy in a low-inflation era
David L. Reifschneider
John C. Williams

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.

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David L. Reifschneider & John C. Williams, "Three lessons for monetary policy in a low-inflation era" , Federal Reserve Bank of Boston, Conference Series ; [Proceedings], pages 936-978, number y:2000:p:936-978, 2000.
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Keywords: Monetary policy ; Inflation (Finance) ; Interest rates
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