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Working Paper
Should the ECB Adjust Its Strategy in the Face of a Lower r*?
Andrade, Philippe; Gali, Jordi; Le Bihan, Hervé; Matheron, Julien (2021-04-01)
We address the question in this paper’s title using an estimated New Keynesian DSGE model of the euro area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, r*, increases the probability of hitting the lower bound constraint, which entails significant welfare costs and warrants an adjustment of the monetary policy strategy. Under an unchanged monetary policy rule, an increase in the inflation target of eight-tenths the size of the drop in the real natural rate of interest is ...
Working Papers , Paper 22-1

Working Paper
Effective Lower Bound Risk
Schmidt, Sebastian; Nakata, Taisuke; Hills, Timothy S. (2019-11-04)
Even when the policy rate is currently not constrained by its effective lower bound (ELB), the possibility that the policy rate will become constrained in the future lowers today's inflation by creating tail risk in future inflation and thus reducing expected inflation. In an empirically rich model calibrated to match key features of the U.S. economy, we find that the tail risk induced by the ELB causes inflation to undershoot the target rate of 2 percent by as much as 50 basis points at the economy's risky steady state. Our model suggests that achieving the inflation target may be more ...
Finance and Economics Discussion Series , Paper 2019-077

Working Paper
A Time Series Model of Interest Rates With the Effective Lower Bound
Johannsen, Benjamin K.; Mertens, Elmar (2016-04-04)
Modeling interest rates over samples that include the Great Recession requires taking stock of the effective lower bound (ELB) on nominal interest rates. We propose a flexible time? series approach which includes a ?shadow rate??a notional rate that is less than the ELB during the period in which the bound is binding?without imposing no?arbitrage assumptions.{{p}}The approach allows us to estimate the behavior of trend real rates as well as expected future interest rates in recent years.
Finance and Economics Discussion Series , Paper 2016-033

Working Paper
Implications of Inflation Dynamics for Monetary Policy Strategies
Chung, Hess T.; Jones, Callum J.; Lepetit, Antoine; Martin, Fernando M. (2025-08-22)
This paper considers robust monetary policy strategies both in situations of low demand and low inflation and when economic developments pose a tradeoff between inflation and output stabilization. We proceed in two parts. First, our quantitative analysis suggests that asymmetric average inflation targeting can provide modest benefits over other inflation-targeting strategies when the risks associated with the effective lower bound remain significant. Second, motivated by the recent experience of persistent supply shocks and rapid increases in inflation, we describe the main qualitative ...
Finance and Economics Discussion Series , Paper 2025-072

Working Paper
Labor Market Dynamics, Monetary Policy Tradeoffs, and a Shortfalls Approach to Pursuing Maximum Employment
Bundick, Brent; Cairó, Isabel; Petrosky-Nadeau, Nicolas (2025-08-22)
This paper reviews recent academic studies to assess the implications of adopting a shortfalls, rather than a deviations, approach to pursuing maximum employment. Model-based simulations from these studies suggest three main findings. First, shortfalls rules generate inflationary pressure relative to deviations rules, which offsets downward pressure on inflation stemming from the presence of the effective lower bound. Second, since monetary policy leans against these inflationary pressures, a shortfalls rule implies a limited effect on average outcomes in the labor market. Finally, ...
Finance and Economics Discussion Series , Paper 2025-068

Working Paper
Monetary Policy and Economic Performance Since the Financial Crisis
Gagnon, Etienne; Martinez-Garcia, Enrique; Caldara, Dario; Neely, Christopher J. (2020-08-28)
We review the macroeconomic performance over the period since the Global Financial Crisis and the challenges in the pursuit of the Federal Reserve’s dual mandate. We characterize the use of forward guidance and balance sheet policies after the federal funds rate reached the effective lower bound. We also review the evidence on the efficacy of these tools and consider whether policymakers might have used them more forcefully. Finally, we examine the post-crisis experience of other major central banks with these policy tools.
Globalization Institute Working Papers , Paper 399

Working Paper
Distributional Considerations for Monetary Policy Strategy
Feiveson, Laura J.; Gornemann, Nils; Hotchkiss, Julie L.; Mertens, Karel; Sim, Jae W. (2020-08-27)
We show that makeup strategies, such as average inflation targeting and price-level targeting, can be more effective than a flexible inflation targeting strategy in overcoming the obstacles created by the effective lower bound in a heterogeneous agent New Keynesian (HANK) model. We also show that the macroeconomic stabilization benefits from such alternative strategies can be substantially larger in a HANK environment than in a representative agent New Keynesian model. We argue that gains in employment outcomes from switching to an alternative strategy would generate disproportionate ...
Finance and Economics Discussion Series , Paper 2020-073

Working Paper
An Analysis of the Literature on International Unconventional Monetary Policy
Bhattarai, Saroj; Neely, Christopher J. (2020-05-04)
This paper evaluates the literature on international unconventional monetary policies (UMP). Introducing market segmentation, limits-to-arbitrage, and time-consistent policy in standard models permits a theoretical role for UMP. Empirical studies provide compelling evidence that UMP influenced international asset prices and tail-risk in the desired manner. Calibrated modeling and vector autoregressive (VAR) exercises imply that these policies also improved macroeconomic outcomes. We assess the recent debate on the empirical evidence and discuss central bank assessments of UMP. Despite ...
Working Papers , Paper 2016-021

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