Go to Top

The effective lower bound and the desirability of gradual interest rate adjustments

Sebastian Schmidt, (2018), “The effective lower bound and the desirability of gradual interest rate adjustments”, ECB, Research Bulletin No. 45, 13 April

The lower bound on nominal interest rates makes it desirable for monetary policy to aim for gradual adjustments of the policy rate in addition to the stabilisation of inflation and the output gap. In a situation where the economy is in recession, inflation is below target, and the policy rate has been brought down to its effective lower bound (ELB), stabilising the economy becomes more challenging. The recent episode of subdued inflation rates and low nominal interest rates in many advanced economies has stimulated new research on how current monetary policy frameworks and strategies could be adjusted to better cope with large economic downturns in the future. For instance, several studies have emphasised the potential benefits of price-level targeting and nominal GDP-level targeting. This article focuses on an alternative remedy, summarising recent work by Nakata and Schmidt (2016) on how a monetary policy strategy that entails slow policy-rate adjustments in response to changes in economic conditions can mitigate the adverse consequences of the ELB for macroeconomic stabilisation.

Relevant Posts