Monetary policy rules and the effective lower bound in the Euro area

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dc.contributor Bank of Finland Haavio, Markus Laine, Olli-Matti 2021-04-08T09:50:44Z 2021-04-08T09:50:44Z 2021
dc.identifier.isbn 978-952-323-371-3
dc.identifier.issn 1456-6184
dc.description.abstract We analyze the economic performance of different monetary policy strategies, or rules, in a low interest rate environment, using simulations with a DSGE model which has been estimated for the euro area. We study how often the effective lower bound of interest rates (ELB) is likely to bind, and how much forgone monetary policy accommodation this entails. Macroeconomic outcomes are measured by the mean levels and the volatility of output (gaps), unemployment and inflation. We present three sets of results. First, the macroeconomic costs of the ELB are likely to grow in a non-linear manner if the monetary policy space (the difference between the normal, or average, level of nominal interest rates and the ELB) shrinks. Second, a point inflation target appears to outperform a target range. Third, the (relative) performance of low-for-long (L4L) monetary policy rules depends on the size of the monetary policy space. The L4L rules tend to perform well, if the monetary space is small, but if the space is larger these rules, while stabilizing inflation, may lead to more volatility in the real economy than flexible inflation targeting.
dc.format.extent 33
dc.language.iso ENG
dc.relation.ispartofseries Bank of Finland Research Discussion Papers
dc.subject.other monetary policy rules
dc.subject.other effective lower bound
dc.subject.other euro area
dc.title Monetary policy rules and the effective lower bound in the Euro area
dc.type Paper
dc.identifier.urn URN:NBN:fi:bof-202104081174
dc.subject.jel E31
dc.subject.jel E32
dc.subject.jel E52
dc.subject.jel E58 Bank of Finland Research Discussion Papers
dc.series.year 2021
dc.series.number 5/2021 8.4.2021
dc.subject.yso rahapolitiikka
dc.subject.yso strategia
dc.subject.yso säännöt
dc.subject.yso euroalue
dc.subject.yso korko
bof-internal.includedInCRIS 1
dc.type.okm D4

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