How to cope with the effective lower bound and a low neutral rate: a comparison of alternative monetary policy strategies

How to cope with the effective lower bound and a low neutral rate: a comparison of alternative monetary policy strategies

Ottobre 2019
978-88-6856-145-1

In the last decade, the growth performance has been disappointing and inflation has remained below its desired value for a long period of time, notwithstanding the efforts of central banks to provide as much stimulus as possible. Large enough financial shocks and the trend decline in interest rate have reduced the effectiveness of standard monetary policy. A low level of the natural rate of interest increases the probability of hitting the ELB: a skilful steering of expectations becomes essential to restore the effectiveness of central banks' actions; in this respect, inflation targeting seems lacking. The objective of this research is to provide empirical evidence that strategies like price-level targeting or average inflation targeting are in several respects more effective in stabilising output and inflation and in reducing the frequency of ELB episodes. These alternative monetary policy strategies seem able to outperform inflation targeting even with a higher inflation objective.