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 C.E.P.R. Discussion Papers

Abstract: We examine how private sector agents might learn a new monetary strategy in a stochastic environment in which large inflationary and deflationary shocks may occur unexpectedly. We consider a central bank that adopts a new asymmetric average inflation targeting rule aimed at countering the disinflationary bias imparted by the effective lower bound (ELB). The new rule is announced while at 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. A large inflation surprise may thus give rise to a novel policy dilemma: The central bank could offset some of the inflation-induced learning loss by being even more accommodative than its new strategy, but this decision comes at the cost of higher near-term inflation and greater uncertainty about monetary policy.

JEL-codes: C63 E31 E52 (search for similar items in EconPapers)
Date: 2023-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP18235 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:18235

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP18235

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().