Regulatory News

Economic Letter: Monetary policy regimes and the lower bound on interest rates

25 May 2018 Press Release

Central Bank of Ireland

An Economic Letter by Giuseppe Corbisiero considers whether the toolbox currently in use at central banks might not prove sufficient to deal with another severe depression if long-run real interest rates remain at their current low levels, limiting the room available to cut short-term rates in the future. The research compares different monetary policy regimes according to how strongly they stimulate the economy during recessions, when policy rates could be constrained by the zero lower bound.

The key findings are:

  • Strict inflation targeting can be less effective than other monetary policy approaches, due to weaker stimulus at the zero lower bound.
  • Price-level targeting is likely to increase the variability of inflation and output in the short run and under a full commitment to this approach, central banks would, for example, need to respond to any oil price shock.
  • A hybrid monetary policy regime can incorporate the main advantage of a model targeting the price-level, namely a faster recovery from a recession, without suffering from amplified short-term fluctuations of inflation and output.

The views presented in Economic Letters are those of the authors and do not necessarily represent the official views of the Central Bank of Ireland.

Library of Economic Letters



Original Article Here

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