Abstract

ABSTRACT:

Constraints on the setting of short-term interest rates due to the effective lower bound are likely to bind more often in the future than in the past if the neutral real rate of interest remains in the neighborhood of 1 percent. This paper argues that the Federal Open Market Committee should commit to pursuing a "lower-for-longer" or "makeup" strategy for setting short-term rates when the zero bound binds. This strategy is consistent with the goal of targeting 2 percent inflation, on average, over the business cycle. A "lower-for-longer" approach would improve economic performance during zero-lower-bound episodes and avoid an erosion of inflation expectations.

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Additional Information

ISSN
1533-4465
Print ISSN
0007-2303
Pages
pp. 573-579
Launched on MUSE
2019-09-05
Open Access
No
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