Mind the Gap When Exiting Low-for-Long

Wataru Hagio, Daisuke Ikeda, Koji Takahashi and Keisuke Yoshida
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Wataru Hagio: Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: wataru.hagio@boj.or.jp)
Daisuke Ikeda: Head of Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: daisuke.ikeda@boj.or.jp)
Koji Takahashi: Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouji.takahashi-2@boj.or.jp)
Keisuke Yoshida: Research and Statistics Department, Bank of Japan (E-mail: keisuke.yoshida@boj.or.jp)

No 26-E-02, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: Prolonged low interest rates can be stimulative while leading agents to believe rates will remain lower for longer than central banks intend. When rates rise, however, agents may perceive this as surprise tightening, causing economic contraction. To articulate this unintended effect, this paper develops a New Keynesian model with learning and forward guidance. It finds that prolonged low rates lower agents' perceived nominal neutral rate, and the correction of their belief during rate hikes precipitates economic downturns. Low credibility about forward guidance amplifies this impact. Empirical support is provided by estimating a perceived monetary policy rule using professional forecast data.

Keywords: Low-for-long interest rates; learning; neutral nominal rates; forward guidance; imperfect credibility (search for similar items in EconPapers)
JEL-codes: E32 E52 E71 (search for similar items in EconPapers)
Date: 2026-02
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