Monetary policy strategies in the New Normal: A model-based analysis for the euro area

Fabio Busetti, Stefano Neri, Alessandro Notarpietro and Massimiliano Pisani

Journal of Macroeconomics, 2021, vol. 70, issue C

Abstract: A calibrated New Keynesian model of the euro area is used to evaluate the stabilization properties of alternative monetary policy strategies when the natural rate of interest is low (“new normal”) and the probability of reaching the effective lower bound (ELB) is non-negligible. Price level targeting is the most effective strategy in terms of stabilizing inflation and output and reducing the duration and frequency of ELB episodes. Temporary price level targeting is also effective in mitigating the ELB constraint, although its stabilization properties are inferior to those of price level targeting. Backward-looking average inflation targeting performs well and is preferable to inflation targeting. The effectiveness of these alternative strategies hinges upon the commitment of a central bank to keeping the policy rate “lower for longer” and is influenced by agents’ expectation formation mechanism.

Keywords: Monetary policy; Natural rate of interest; Effective lower bound (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (11)

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Working Paper: Monetary policy strategies in the New Normal: a model-based analysis for the euro area (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:70:y:2021:i:c:s0164070421000665

DOI: 10.1016/j.jmacro.2021.103366

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