Fed paper studies how to tackle the lower bound
Simple policy rules lead to inflation falling “systematically” short of 2% target
Policymakers operating in a world of low real interest rates will find themselves hitting the effective lower bound (ELB) often and struggling to restore inflation and output to equilibrium levels, according to a working paper published by the Federal Reserve.
Authors Michael Kiley and John Roberts turn to a dynamic stochastic general equilibrium model in assessing how to respond to the ELB. They find the “incidence and severity” of ELB episodes is greater than earlier studies, and warn
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