Monetary policy strategies for the European Central Bank

We develop a behavioral DSGE model which addresses the forward guidance puzzle. We then use the estimated model to assess if unconventional monetary policy tools such as negative interest rates, forward guidance, and asset purchases can provide efficient macroeconomic stabilization in a low nominal...

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Bibliographic Details
Published inJournal of economic dynamics & control Vol. 132; p. 104211
Main Authors Erceg, Christopher J., Jakab, Zoltan, Lindé, Jesper
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.11.2021
Subjects
Asset purchases
DSGE models
Effective lower bound
Forward guidance
Negative interest rates
Unconventional monetary policy
DSGE models
Negative interest rates
Effective lower bound
Asset purchases
E52
Forward guidance
E58
Unconventional monetary policy
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Summary:We develop a behavioral DSGE model which addresses the forward guidance puzzle. We then use the estimated model to assess if unconventional monetary policy tools such as negative interest rates, forward guidance, and asset purchases can provide efficient macroeconomic stabilization in a low nominal and real interest rate environment. While these tools boost output and inflation, the rebound from deep recession can still be painfully slow. Makeup strategies, including average inflation and price level targeting, can further support recovery and reduce downside risks, though the benefits are quite modest under behavioral expectations.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2021.104211