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Monetary policy strategies for the European Central Bank

Christopher Erceg, Zoltán Jakab and Jesper Lindé

Journal of Economic Dynamics and Control, 2021, vol. 132, issue C

Abstract: We develop a behavioral DSGE model which addresses the forward guidance puzzle. We then use the estimated model to assess if unconventional monetary policy tools such as negative interest rates, forward guidance, and asset purchases can provide efficient macroeconomic stabilization in a low nominal and real interest rate environment. While these tools boost output and inflation, the rebound from deep recession can still be painfully slow. Makeup strategies, including average inflation and price level targeting, can further support recovery and reduce downside risks, though the benefits are quite modest under behavioral expectations.

Keywords: DSGE models; Effective lower bound; Negative interest rates; Unconventional monetary policy; Asset purchases; Forward guidance (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jedc.2021.104211

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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