Taisuke Nakata, Sebastian Schmidt, and Paul Yoo | The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs)–policies aimed at stabilizing the output growth–less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding.


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