Learning Monetary Policy Strategies at the Effective Lower Bound with Sudden Stops

Spencer Krane, Leonardo Melosi and Matthias Rottner

No 18235, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine how private sector agents might learn a new monetary strategy introduced while policy rates are at their effective lower bound (ELB) in an environment with large inflationary and deflationary shocks. We consider the adoption of a new asymmetric average inflation targeting rule aimed at countering the disinflationary bias imparted by the ELB. The most crucial time for learning runs from when rates would be near liftoff under the old strategy through early liftoff under the new rule. Recessionary shocks during this time could delay learning while large inflationary shocks could outright stop it, inhibiting the ability of the new strategy to address the costs associated with the ELB. Using the US post-Covid experience as an example, we also find that the monetary policy shocks can have important feedback on the learning process.

JEL-codes: C63 E31 E52 (search for similar items in EconPapers)
Date: 2023-06
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