Strengthening the Fomc's Framework in View of the Effective Lower Bound and Some Considerations Related to Time-Inconsistent Strategies

42 Pages Posted: 2 Sep 2020

See all articles by Fernando Duarte

Fernando Duarte

Federal Reserve Bank of New York

Benjamin K. Johannsen

Board of Governors of the Federal Reserve System

Leonardo Melosi

Federal Reserve Bank of Chicago

Taisuke Nakata

Board of Governors of the Federal Reserve System

Date Written: August, 2020

Abstract

We analyze the framework for monetary policy in view of the effective lower bound (ELB). We find that the ELB is likely to bind in most future recessions and propose some ways that theoretical models imply that the framework could be strengthened. We also discuss ways that commitment strategies, which are not part of the framework, may improve economic outcomes. These policies can suffer from a time-inconsistency problem, which we analyze.

Keywords: Monetary policy, Effective lower bound, Forward guidance, Balance sheet policies, Commitment policies, Time inconsistency

JEL Classification: E31, E32, E52, E58

Suggested Citation

Duarte, Fernando and Johannsen, Benjamin K. and Melosi, Leonardo and Nakata, Taisuke, Strengthening the Fomc's Framework in View of the Effective Lower Bound and Some Considerations Related to Time-Inconsistent Strategies (August, 2020). FEDS Working Paper No. 2020-067, Available at SSRN: https://ssrn.com/abstract=3684907 or http://dx.doi.org/10.17016/FEDS.2020.067

Fernando Duarte (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://www.newyorkfed.org/research/economists/duarte/index.html

Benjamin K. Johannsen

Board of Governors of the Federal Reserve System ( email )

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

Leonardo Melosi

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Taisuke Nakata

Board of Governors of the Federal Reserve System ( email )

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

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