Inflation Targeting and Zero Lower Bound Risk: Cross-Country Evidence

António Afonso and Leonardo Zorzi

No 12920, CESifo Working Paper Series from CESifo

Abstract: In the aftermath of the 2007-2009 global financial crisis, a growing body of research questioned the conventional inflation-targeting framework that has long guided monetary policy, arguing that the inflation targets adopted by major central banks may have been set too low. We evaluate the likelihood that advanced economies will become constrained by the effective lower bound on nominal interest rates in the future. Therefore, using end-quarter data over the period 1999Q1 to 2025Q4, we develop a counterfactual framework that quantifies how this risk changes under alternative scenarios with higher average inflation. Using a vector autoregression model and an ARDL-ECM framework, we estimate the cumulative probability of hitting the Zero Lower Bound (ZLB), that is, the probability that policy rates reach the constraint at least once during the projection horizon. Our results indicate that Switzerland and Japan face the highest risk of encountering the ZLB, whereas Sweden, the Euro Area, the United States, and Canada exhibit an intermediate level of risk. By contrast, the United Kingdom and Norway appear to be the least vulnerable. These findings are broadly consistent with cross-country differences in average inflation and nominal interest rate levels.

Keywords: inflation; inflation targeting; monetary policy; zero lower bound; VAR; ARDL (search for similar items in EconPapers)
JEL-codes: E02 E31 E47 E52 E58 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12920

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