Monetary Policy Strategies for a Low-Rate Environment
Michael Kiley () and
No 2019-009, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)
In low-rate environments, policy strategies that involve holding rates ?lower for longer? (L4L) may mitigate the effects of the effective lower bound (ELB). However, these strategies work in part by managing the public?s expectations, which is not always realistic. Using the Fed?s large-scale macroeconometric model, we study the effectiveness of L4L policies when financial market participants are forward-looking but other agents are not. We find that the resulting limited ability to manage expectations reduces but does not eliminate the advantages of L4L policies. The best policies provide adequate stimulus at the ELB while avoiding sizable overshoots of inflation and output.
Keywords: Intererst rates; Model comparison; Monetary policy (search for similar items in EconPapers)
JEL-codes: E13 E52 E58 E61 (search for similar items in EconPapers)
Pages: 10 pages
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Monetary Policy Strategies for a Low-Rate Environment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2019-09
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