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

Arbeitspapier

We analyze the economic performance of di§erent 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 e§ective 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 ináation. 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 di§erence between the normal, or average, level of nominal interest rates and the ELB) shrinks. Second, a point ináation 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 ináation, may lead to more volatility in the real economy than áexible ináation targeting.

Object Details

• ISBN: 978-952-323-371-3
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Finland Research Discussion Papers ; No. 5/2021

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Business Fluctuations; Cycles ; Monetary Policy ; Central Banks and Their Policies
• Subject: monetary policy rules ; effective lower bound ; euro area

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Haavio, Markus ; Laine, Olli-Matti
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/240345
• Last update: 10.03.2025, 11:43 AM CET