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2004•ETS Research Bulletin SeriesRequires access

Monetary Policy in a Low Inflation Environment

Klaus Adam

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Abstract

Monetary policy is far from being ineffective when interest rates are close to zero or already at the lower bound. Close to zero, even more aggressive reactions to shocks seem optimal. At the lower bound, it is the credibility of the central bank, which is crucial to affect inflationary expectations and rescue the economy from the liquidity trap. JEL Classification: E5

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Monetary policy is far from being ineffective when interest rates are close to zero or already at the lower bound. Close to zero, even more aggressive reactions to shocks seem optimal. At the lower bound, it is the credibility of the central bank, which is crucial to affect inflationary expectations and rescue the economy from the liquidity trap. JEL Classification: E5

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Available abstract

Monetary policy is far from being ineffective when interest rates are close to zero or already at the lower bound. Close to zero, even more aggressive reactions to shocks seem optimal. At the lower bound, it is the credibility of the central bank, which is crucial to affect inflationary expectations and rescue the economy from the liquidity trap. JEL Classification: E5

Key concepts: Liquidity trap, Zero lower bound, Monetary policy, Credibility, Economics, Monetary economics, Inflation (cosmology), Market liquidity

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