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Chapter Three: Tying Down The Anchor: Monetary Policy Rules And The Lower Bound On Interest Rates.pdf

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Preview of Chapter Three: Tying Down the Anchor: Monetary Policy Rules and the Lower Bound on Interest Rates
🔗 Source: hoover.org
📊 Size: 3.58 MB
📄 Pages: 71 pages
⬇️ Downloads: 61

Summary

Central banks face challenges due to the lower bound on nominal interest rates, which can limit their ability to offset negative economic shocks and anchor inflation expectations at too low a level. This paper studies the effect of various monetary policy frameworks and rules on inflation expectations and macroeconomic outcomes using a New Keynesian model with a lower bound on interest rates. The model features forward-looking economic decision making, with inflation determined by a Phillips curve and the output gap linked to the real interest rate and expectations of future output gaps. The paper investigates three classes of monetary policy frameworks: standard inflation-targeting frameworks, average-inflation-targeting policies, and policies with an upper bound on interest rates. The results show that optimal policy under discretion can lead to below-target inflation and output gaps when the natural rate of interest is low, and that alternative policy frameworks can mitigate these effects by increasing inflation expectations and reducing the likelihood of hitting the lower bound on interest rates.

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Central banks face challenges due to the lower bound on nominal interest rates, which can limit their ability to offset negative economic shocks and anchor...

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  • File Format: PDF
  • File Size: 3.58 MB
  • Pages: 71
  • Language: EN
  • Total Downloads: 61
  • Last Updated: 1 week ago

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Chapter guideChapter tutorialThree: guideThree: tutorialTying guideTying tutorialDown guideDown tutorialAnchor: guideAnchor: tutorialMonetary guideMonetary tutorialPolicy guidePolicy tutorialRules guideRules tutorialLower guideLower tutorialBound guideBound tutorialInterest guideInterest tutorialRates guideRates tutorial

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