Ben S. Bernanke, Michael T. Kiley, and John M. Roberts | In low-rate environments, policy strategies that involve holding rates “lower for longer” (L4L) may mitigate the effects of the effective lower bound (ELB). However, these strategies work in part by managing the public’s expectations, which is not always realistic. Using the Fed’s large-scale macroeconometric model, we study the effectiveness of L4L policies when financial market participants are forward-looking but other agents are not. We find that the resulting limited ability to manage expectations reduces but does not eliminate the advantages of L4L policies. The best policies provide adequate stimulus at the ELB while avoiding sizable overshoots of inflation and output.
Appendix (PDF)

FRB: Finance and Economics Discussion Series Working Papers

Read the full FEDS working paper at: https://www.federalreserve.gov/feeds/feeds.htm

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