Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/228230 
Year of Publication: 
2020
Series/Report no.: 
ECB Working Paper No. 2352
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We study the incidence and severity of lower-bound episodes and the efficacy of three types of state-dependent policies - forward guidance about the future path of interest rates, large-scale asset purchases and spending-based fiscal stimulus - in ameliorating the adverse consequences stemming from the effective lower bound on nominal interest rates. In particular, we focus on the euro area economy and examine, using the ECB's New Area-Wide Model, the consequences of the lower bound both for the near-term economic outlook, characterised by persistently low nominal interest rates and inflation, and in a lasting low-real-interest-rate world. Our findings suggest that, if unaddressed, the lower bound can have very substantial costs in terms of worsened macroeconomic performance. Forward guidance, if fully credible, is most powerful and can largely undo the distortionary effects due to the lower bound. A combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is almost equally effective, in particular when asset purchases enhance the credibility of the forward guidance policy via a signalling effect.
Subjects: 
Effective lower bound
monetary policy
forward guidance
asset purchases
fiscal policy
euro area
JEL: 
E31
E32
E37
E52
E62
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3995-9
Document Type: 
Working Paper

Files in This Item:
File
Size
676.24 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.