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Should the ECB adjust its strategy in the face of a lower

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dc.contributor.author Andrade, Philippe
dc.contributor.author Galí, Jordi, 1961-
dc.contributor.author Le Bihan, Hervé
dc.contributor.author Matheronc, Julien
dc.date.accessioned 2021-10-08T07:55:17Z
dc.date.issued 2021
dc.identifier.citation Andrade P, Galí J, Le Bihan H, Matheronc J. Should the ECB adjust its strategy in the face of a lower r*? Journal of Economic Dynamics and Control. 2021 Nov;132:104207. DOI: 10.1016/j.jedc.2021.104207
dc.identifier.issn 0165-1889
dc.identifier.uri http://hdl.handle.net/10230/48607
dc.description.abstract We address this question using an estimated New Keynesian DSGE model of the Euro Area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, increases the probability of hitting the lower bound constraint, which entails significant welfare costs and warrants an adjustment of the monetary policy strategy. Under an unchanged monetary policy rule, an increase in the inflation target of eight tenths the size of the drop in the real natural rate of interest is warranted. Absent an increase in the inflation target, and assuming the effective lower bound prevents the ECB from implementing more aggressive negative interest rate policies, adjusting the monetary strategy requires considering alternative instruments or policy rules, such as committing to make-up for recent, below-target inflation realizations.
dc.description.sponsorship Galí acknowledges financial support from the Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (CEX2019-000915-S) and from the Generalitat de Catalunya, through CERCA and SGR Programme (2017-SGR-1393).
dc.format.mimetype application/pdf
dc.language.iso eng
dc.publisher Elsevier
dc.relation.ispartof Journal of Economic Dynamics and Control. 2021 Nov;132:104207
dc.rights © Elsevier http://dx.doi.org/10.1016/j.jedc.2021.104207
dc.title Should the ECB adjust its strategy in the face of a lower
dc.type info:eu-repo/semantics/article
dc.identifier.doi http://dx.doi.org/10.1016/j.jedc.2021.104207
dc.subject.keyword Inflation target
dc.subject.keyword Effective lower bound
dc.subject.keyword Monetary policy strategy
dc.subject.keyword Euro-area
dc.relation.projectID info:eu-repo/grantAgreement/ES/2PE/CEX2019-000915-S
dc.rights.accessRights info:eu-repo/semantics/embargoedAccess
dc.type.version info:eu-repo/semantics/acceptedVersion
dc.embargo.liftdate 2023-09-10
dc.date.embargoEnd info:eu-repo/date/embargoEnd/2023-09-10

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