Asymmetric monetary policy responses and the effects of a rise in the inflation target
Benjamin Garcia ()
Working Papers Central Bank of Chile from Central Bank of Chile
The effective lower bound (ELB) on interest rates introduces an explicit non-linearity for feasible monetary policy paths: interest rates cannot go below a certain rate. In a forward looking environment, the ELB can affect the monetary policy decisions not only when the bound is reached, but also when there is a possibility that the bound may be reached in the future. In this context, as a recommendation for monetary policy in a low-inflation environment, Reifschneider and Williams (2002 FOMC) propose an asymmetric Taylor Rule with a threshold level that automatically drives the interest rate to zero whenever they fall below one percent. I test the hypothesis that the Federal Reserve has behaved in a manner consistent with Reifschneider and Williams’ advice, finding evidence of a negative correlation between the level of the interest rate and the strength of the monetary policy response. Using an estimated nonlinear DSGE model, I show that a monetary policy which act symmetrically and asymmetrically can have significantly different consequences. In particular, I study the relevance of this behavior for the analysis of a permanent rise of the inflation target.
New Economics Papers: this item is included in nep-cba, nep-dge, nep-knm, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:819
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