Finance and Economics Discussion Series (FEDS)

Twitter Share RSS

February 2019

Monetary Policy Strategies for a Low-Rate Environment

Ben S. Bernanke, Michael T. Kiley, and John M. Roberts

Abstract:

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.
Appendix (PDF)

Accessible materials (.zip)

Keywords: Intererst rates, Model comparison, Monetary policy

DOI: https://doi.org/10.17016/FEDS.2019.009

PDF: Full Paper

Back to Top
Last Update: January 09, 2020