Monetary Policy Strategies for a Low-Rate Environment

10 Pages Posted: 19 Feb 2019 Last revised: 23 Feb 2019

See all articles by Ben S. Bernanke

Ben S. Bernanke

Board of Governors of the Federal Reserve System

Michael T. Kiley

Board of Governors of the Federal Reserve System

John M. Roberts

Board of Governors of the Federal Reserve System

Date Written: 2019-02-13

Abstract

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.

Keywords: Intererst rates, Model comparison, Monetary policy

JEL Classification: E58, E61, E52, E13

Suggested Citation

Bernanke, Ben S. and Kiley, Michael T. and Roberts, John M., Monetary Policy Strategies for a Low-Rate Environment (2019-02-13). FEDS Working Paper No. 2019-009. Available at SSRN: https://ssrn.com/abstract=3336046 or http://dx.doi.org/10.17016/FEDS.2019.009

Ben S. Bernanke (Contact Author)

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Michael T. Kiley

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)

John M. Roberts

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2946 (Phone)

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