Three lessons for monetary policy in a low-inflation era

By D. Reifschneider, John C. Williams. 2000

176 citations recorded by the source corpus.

The zero lower bound on nominal interest rates constrains the central bank's ability to stimulate the economy during downturns. We use the FRB/US model to quantify the effects of the bound on macroeconomic stabilization and to explore how policy can be designed to minimize these effects. During particularly severe contractions, open-market operations alone may be insufficient to restore equilibrium; some other stimulus is needed. Abstracting from such rare events, if policy follows the Taylor rule and targets a zero inflation rate, there is a significant increase in the variability of output but not inflation. However, a simple modification to the Taylor rule yields a dramatic reduction in the detrimental effects of the zero bound.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/025022c295e26d6d8c0fb203aa58f821bb821034

Citations in the corpus

• Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate (2006, unknown): “With α = 0, the ATR is the same as the standard Taylor rule.”
• Keynesian Government Spending Multipliers and Spillovers in the Euro Area (2011, unknown): “Cogan, Cwik, Taylor, and Wieland (2010), however, show that this conclusion is not robust.”
• The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty (2001, unknown): “, 1997; David Reifschneider et al., 1999). In the multicountry model of Taylor (1993)— hereafter referred to as TMCM—prices are determined by staggered wage contracts, while consumption and investment expenditures are explicitly forwardlooking and exhibit relatively little intrinsic inertia.”
• The science of monetary policy: an imperfect knowledge perspective (2018, unknown): “…system is described by the following true data-generating process for output, in ation and the nominal interest rate zt = H (!t 1) 50However, Reifschneider and Williams (2000) also adduce evidence that a Taylor-type rule with a high degree of interest smoothing and a policy of price-level…”
• Monetary Policy Strategy: Lessons from the Crisis (2011, unknown): “Research before the crisis took the view that as long as the inflation objective was around 2%, then the zero-lower-bound-problem would not be a very serious problem because it would be infrequent and short lived (Reifschneider and Williams, 2000 and Coenen, Orphanides and Wieland, 2004).”
• Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates (2006, unknown): “Reifschneider and Williams (2000) and Wolman (2005) show that simple policy rules formulated in terms of a price level target can considerably reduce these real distortions.”
• The Zero-Interest-Rate Bound and the Role of the Exchange Rate for Monetary Policy in Japan (2003, unknown): “The short-term nominal interest rate is set according to Taylor’s (1993b) rule (equation (M-6)) in response to inflation deviations from the policymaker’s inflation target π∗ and output deviations from potential.”
• Global Liquidity Trap (2010, unknown): “…economy, the properties of the optimal (or at least desirable) monetary policy under such circumstances have been investigated, for instance, by Reifschneider and Williams (2000), Eggertsson and Woodford (2003), Jung, Teranishi, and Watanabe (2005), Kato and Nishiyama (2005), Adam and Billi…”