Effective lower bound has ‘tail risk’ influence on monetary policy, ECB paper argues
Model of US economy suggests effective lower bound can cause undershooting of inflation target
A working paper published by the European Central Bank examines the impact of the effective lower bound (ELB) on monetary policy.
In The risky steady state and the interest rate lower bound, Timothy Hills, Taisuke Nakata and Sebastian Schmidt build what they call "an empirically rich model, calibrated to match key features of the US economy".
Using this model, they find "the tail risk induced by the ELB" can cause inflation to undershoot the target rate.
The ELB thus has an effect even when the
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