Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240345 
Year of Publication: 
2021
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 5/2021
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We analyze the economic performance of di§erent monetary policy strategies, or rules, in a low interest rate environment, using simulations with a DSGE model which has been estimated for the euro area. We study how often the e§ective lower bound of interest rates (ELB) is likely to bind, and how much forgone monetary policy accommodation this entails. Macroeconomic outcomes are measured by the mean levels and the volatility of output (gaps), unemployment and ináation. We present three sets of results. First, the macroeconomic costs of the ELB are likely to grow in a non-linear manner if the monetary policy space (the di§erence between the normal, or average, level of nominal interest rates and the ELB) shrinks. Second, a point ináation target appears to outperform a target range. Third, the (relative) performance of low-for-long (L4L) monetary policy rules depends on the size of the monetary policy space. The L4L rules tend to perform well, if the monetary space is small, but if the space is larger these rules, while stabilizing ináation, may lead to more volatility in the real economy than áexible ináation targeting.
Subjects: 
monetary policy rules
effective lower bound
euro area
JEL: 
E31
E32
E52
E58
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-371-3
Document Type: 
Working Paper

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