In the aftermath of the global financial crisis, central banks started being confronted with severe challenges that led to an unprecedented policy response in terms of the size and variety of monetary policy measures. One such measure centred on central banks communicating to the public more...

Occasionally binding constraints (OBCs) like the zero lower bound (ZLB) can lead to multiple equilibria, and so to belief-driven recessions. To aid in finding policies that avoid this, we derive existence and uniqueness conditions for otherwise linear models with OBCs. Our main result gives...

This paper investigates the predictive power of the shadow rate for the inflation rate in countries with a zero lower bound (the US, the UK and Canada) and in those with negative rates (Japan, the Euro Area and Switzerland). Using shadow rates obtained from two different models (the Wu-Xia...

Negative interest rates remain a controversial policy for central banks. We study a novel signalling channel and ask under what conditions negative rates should exist in an optimal policymaker’s toolkit. We prove two necessary conditions for the optimality of negative rates: a time-consistent...

We address the question in this paper's title using an estimated New Keynesian DSGE model of the euro area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, r*, increases the probability...

We propose a smooth shadow-rate version of the dynamic Nelson-Siegel (DNS) model to analyze the term structure of interest rates during the recent zero lower bound (ZLB) period. By relaxing the no-arbitrage restriction, our shadow-rate model becomes highly tractable with a closed-form yield...

The secular decline in the equilibrium real interest rate observed over the past decades has materially limited the room for policy-rate reductions in recessions, and has led to a marked increase in the incidence of episodes where policy rates are likely to be at, or near, the effective lower...

This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect...

Asset price bubbles are a major source of macroeconomic instability, but can they play a different role in a low interest rates environment? To answer this question, I study an economy in which the natural rate of interest declines permanently, and the zero lower bound makes risk-free interest...

This paper provides new empirical evidence that bears on the efficacy of unconventional monetary policies when the main policy rate is negative. When a negative interest rate policy (NIRP) is deployed in concert with rate forward guidance (FG) and quantitative easing (QE), the identification of...

US monetary policy was constrained from 2008 to 2015 by the zero lower bound, duringwhich the Federal Reserve would likely have lowered the federal funds rate if it wereable to. This paper uses industry-level data to examine how growth was affected. Despitethe zero bound constraint, industries...

Long-term asset purchases carried out by central banks increase the consumption volatility of households holding long-term debt. For this reason, monetary authorities should not just aim at stabilising inflation and the output gap but also mitigate the volatility of their balance sheet. In...

This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect...

Motivated by the recent experience of the U.S. and the Eurozone, the authors describe the quantitative properties of a New Keynesian model with a zero lower bound (ZLB) on nominal interest rates, explicitly accounting for the nonlinearities that the bound brings. Besides showing how such a model...

Negative interest rate policy (NIRP) is associated with a particular friction. The remuneration of banks´ retail deposits tends to be floored at zero, which limits the transmission of policy rate cuts to bank funding costs. We investigate whether this friction affects banks’ reactions under...

In this paper, we extend the basic ‘workhorse’ New Keynesian model by relaxing the rationality assumption in favor of bounded rationality. We broadly follow (Gabaix, 2020) whereby agents are unable to anticipate macroeconomic developments perfectly and assumed to be both partially myopic and...

I explore international monetary policy coordination and its welfare effects under a two-country macroeconomic model with the Zero Lower Bound (ZLB) on nominal interest rates in a floating exchange rate regime. Under the model, I find that monetary policy coordination does not improve total...

This paper examines the uniqueness and learnability of rational expectations equilibrium when the policy rate is occasionally pegged at the zero lower bound (ZLB). We consider a model that features recurring, transient ZLB regimes and compare various interest rate rules which respond to...

This paper considers the performance of average inflation targeting (AIT) policy in a New Keynesian model with adaptive learning agents. Our analysis raises concerns regarding robustness of AIT when agents have imperfect knowledge. In particular, the target steady state can be locally unstable...

Der Kapitalwert lässt sich auch bei Null- und Negativzinsen zumindest über endliche Zeiträume einfach berechnen sowie betriebswirtschaftlich für Investitionsentscheidungen sinnvoll ver­wen­den. Volkswirtschaftlich ist relevant, warum es Zinsen von und unter null überhaupt gibt und ob...

In this paper, we survey the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are...

This paper provides new empirical evidence that bears on the efficacy of unconventional monetary policies when the main policy rate is negative. When a negative interest rate policy (NIRP) is deployed in concert with rate forward guidance (FG) and quantitative easing (QE), the identification of...

We propose a new approach to analyze economic shocks. Our new procedure identifies economic shocks as exogenous shifts in a function; hence, we call them "functional shocks." We show how to identify such shocks and how to trace their effects in the economy via VARs using "VARs with functional...

Concerns of prolonged stagnation periods with near-zero interest rates and deflation have become widespread in many advanced economies. We build a theoretical framework that rationalizes two theories of low interest rates: expectations-trap and secular stagnation in a unified setting. We...

We document a new fact: in U.S., European and Japanese surveys, households do not expect deflation, even in environments where persistent deflation is a strong possibility. This fact stands in contrast to the standard macroeconomic models with rational expectations. We extend a standard New...

This article contributes to the literature by indicating how certain monetary policies impact the compensation incentives of US managers to adopt riskier business policies. Specifically, based on the agency problems between shareholders and managers and between shareholders and creditors, a...

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts. When banks face a lower bound on customer deposit rates, an...

This paper reconsiders the degree to which macroeconomic stabilization is possible when the zero lower bound is a relevant constraint on the effectiveness of conventional monetary policy, under an assumption of bounded rationality. In particular, we reconsider the potential role of...

We examine forward guidance (with known and uncertain duration) in a New Keynesian model for an advanced small open economy, showing that the response of the economy to this policy depends, both quantitatively and qualitatively, on some structural features through calibrations for Sweden and...