Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates
AEA Papers and Proceedings
vol. 109,
May 2019
(pp. 427-32)
Abstract
This paper applies a New Keynesian model to analyze monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under standard inflation-targeting, inflation expectations will be anchored at a level below the inflation target. Two themes emerge from our analysis: first, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework. Second, price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at target and further reduce the effects of the lower bound on the economy.Citation
Mertens, Thomas M., and John C. Williams. 2019. "Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates." AEA Papers and Proceedings, 109: 427-32. DOI: 10.1257/pandp.20191083Additional Materials
JEL Classification
- D84 Expectations; Speculations
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E58 Central Banks and Their Policies