Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates

Thomas M. Mertens and John Williams

AEA Papers and Proceedings, 2019, vol. 109, 427-32

Abstract: This paper applies a New Keynesian model to analyze monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under standard inflation-targeting, inflation expectations will be anchored at a level below the inflation target. Two themes emerge from our analysis: first, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework. Second, price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at target and further reduce the effects of the lower bound on the economy.

JEL-codes: D84 E12 E31 E43 E52 E58 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/pandp.20191083
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Citations: View citations in EconPapers (76)

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Related works:
Working Paper: Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates (2019)
Working Paper: Monetary policy frameworks and the effective lower bound on interest rates (2019)
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