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.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.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.doi http://dx.doi.org/10.1016/j.jedc.2021.104207
• dc.identifier.issn 0165-1889
• dc.identifier.uri http://hdl.handle.net/10230/48607
• dc.language.iso eng
• dc.publisher Elsevier
• dc.relation.ispartof Journal of Economic Dynamics and Control. 2021 Nov;132:104207
• dc.relation.projectID info:eu-repo/grantAgreement/ES/2PE/CEX2019-000915-S
• dc.rights © Elsevier http://dx.doi.org/10.1016/j.jedc.2021.104207
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.subject.keyword Inflation target
• dc.subject.keyword Effective lower bound
• dc.subject.keyword Monetary policy strategy
• dc.subject.keyword Euro-area
• dc.title Should the ECB adjust its strategy in the face of a lower
• dc.type info:eu-repo/semantics/article
• dc.type.version info:eu-repo/semantics/acceptedVersion