Monetary Policy Challenges From Falling Natural Interest Rates

Klaus Adam

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: The real interest rates consistent with stable inflation (the natural rates of interest) has displayed a sustained downward trend in advanced economies over past decades. This has considerably complicated the conduct of monetary policy, which is increasingly constrained by the inability to lower nominal rates further. Over the same time period, the volatility of housing prices and stock prices has increased considerably, generating additional challenges for monetary policy. This paper summarizes recent academic research that analyses the monetary policy implications of lower natural rates and rising asset price volatility in a setting where policy is constrained by a lower bound on nominal rates. It focuses on the implications for (1) the optimal inflation target and (2) the question how monetary policy should respond to asset price movements.

Pages: 25
Date: 2020-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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