Comments on monetary policy at the effective lower bound
Constraints on the setting of short-term interest rates due to the effective lower bound are likely to bind more often in the future than in the past if the neutral real rate of interest remains in the neighborhood of 1 percent. This paper argues that the Federal Open Market Committee should commit...
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| Format: | Article |
| Language: | English |
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Brookings Institution Press
2018
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| Online Access: | View Fulltext in Publisher |
| Summary: | Constraints on the setting of short-term interest rates due to the effective lower bound are likely to bind more often in the future than in the past if the neutral real rate of interest remains in the neighborhood of 1 percent. This paper argues that the Federal Open Market Committee should commit to pursuing a “lower-for-longer” or “makeup” strategy for setting short-term rates when the zero bound binds. This strategy is consistent with the goal of targeting 2 percent inflation, on average, over the business cycle. A “lower-for-longer” approach would improve economic performance during zero-lower-bound episodes and avoid an erosion of inflation expectations. © 2018, Brookings Institution Press. All rights reserved. |
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| ISBN: | 00072303 (ISSN) |
| DOI: | 10.1353/eca.2018.0013 |