Effects of State-Dependent Forward Guidance, Large-Scale Asset Purchases and Fiscal Stimulus in a Low-Interest-Rate Environment

Coenen, Günter; Montes-Galdón, Carlos; Smets, Frank

doi:10.2139/ssrn.3522191

Cited by 18 publications

(25 citation statements)

References 13 publications

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“…Reifschneider (2016), Kiley (2018), Mouabbi and Sahuc (2019) and Chung et al (2019), among others, provide quantitative, model-based assessments of the effectiveness of these nonstandard instruments. Coenen et al (2020) is most closely related to this part of our paper. Like us, they use the NAWM II to analyse interest-rate forward guidance and large-scale asset purchases, though under a slightly different parameterisation of these policies.…”

Section: Introductionmentioning

confidence: 74%

“…Alternative forms of interest-rate forward guidance include non-state-contingent date-based forward guidance(Carlstrom et al, 2015) and threshold-based forward guidance(Coenen and Warne, 2014;Boneva et al, 2018).16 Our formalisation of interest-rate forward guidance follows the approach ofCoenen et al (2020).17 SeeCoenen et al (2020), Section 2, for more details.…”

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confidence: 99%

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Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment

Coenen

Montes-Galdón

Schmidt

2021

Journal of Economic Dynamics and Control

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The secular decline in the equilibrium real interest rate observed over the past decades has materially limited the room for policy-rate reductions in recessions, and has led to a marked increase in the incidence of episodes where policy rates are likely to be at, or near, the effective lower bound on nominal interest rates. Using the ECB's New Area-Wide Model, we show that, if unaddressed, the effective lower bound can cause substantial costs in terms of worsened macroeconomic performance, as reflected in negative biases in inflation and economic activity, as well as heightened macroeconomic volatility. These costs can be mitigated by the use of nonstandard instruments, notably the joint use of interest-rate forward guidance and large-scale asset purchases. When considering alternatives to inflation targeting, we find that make-up strategies such as price-level targeting and average-inflation targeting can, if they are well-understood by the private sector, largely undo the negative biases and heightened volatility induced by the effective lower bound.

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Section: Introductionmentioning

confidence: 74%

mentioning

confidence: 99%

Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment

Coenen

Montes-Galdón

Schmidt

2021

Journal of Economic Dynamics and Control

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“…14 A low natural rate raises the probability and duration of periods in which the policy rate is at its effective lower bound (Brandt et al, 2018). If the central bank follows a symmetric monetary policy rule, inflation in equilibrium will hoover at levels below the target, unless the central bank adopts non-standard measures (Coenen et al, 2020), which are also subject to constraints. The below-target inflation is commonly referred to as disinflationary bias.…”

Section: Long-run Developments In Expectationsmentioning

confidence: 99%

De-anchored Long-term Inflation Expectations in a Low Growth, Low Rate Environment

et al. 2021

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This paper provides evidence of de-anchoring of long-term inflation expectations in the euro area based on both time series and panel methods and data from the ECB Survey of Professional Forecasters. Long-term inflation expectations recorded two sharp and permanent declines: the first after the 2013 disinflation, the second in early 2019. Long-term inflation expectations also started reacting to short-term developments in inflation after the 2013 disinflation. Long-term growth expectations have declined continuously since the early 2000s. Looking forward, the increased likelihood of a low growth and low inflation environment may reduce the monetary policy space. The positive correlation between long-term real GDP growth and inflation expectations suggests that forecasters view future macroeconomic developments as driven mainly by demand-side shocks. Under these circumstances, the risk of a further de-anchoring of long-term inflation expectations remains high.

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“…As in their case, we find that the policy mix has positive effects on inflation. Coenen et al (2020) show that a combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is effective in undoing the distortionary effects due to the ELB, in particular when asset purchases enhance the credibility of the forward guid-ance policy. Different from them, we focus on a mix of two particular fiscal measures, i.e., fiscal transfers to HTM households and public consumption.…”

Section: Introductionmentioning

confidence: 97%

The COVID-19 Shock and a Fiscal-Monetary Policy Mix in a Monetary Union

2020

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This paper evaluates the macroeconomic effects of a monetary and fiscal policy mix implemented in a two-region monetary union in response to the COVID-19 shock. The pandemic is modelled as a mix of recessionary demand and supply shocks affecting both regions simultaneously and symmetrically, under two assumptions: the effective lower bound (ELB) constrains the monetary policy rate; and a fraction of households, labelled 'hand-tomouth' (HTM), consume all their available income in every period. The main results are the following: first, higher lump-sum targeted fiscal transfers to HTM households and public consumption spending in one region, financed by issuing public debt, reduce the recessionary effects both domestically and abroad (via the trade channel). Second, the monetary unionwide recession is mitigated more effectively if both regions implement a fiscal expansion and the central bank limits the increase in long-term rates by purchasing sovereign bonds. Third, fiscal measures are less effective if sovereign bond yields increase relatively more in one region because investors perceive its bonds as risky. Effectiveness can be regained if a supranational fiscal authority issues a safe bond.

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Effects of State-Dependent Forward Guidance, Large-Scale Asset Purchases and Fiscal Stimulus in a Low-Interest-Rate Environment

Cited by 18 publications

References 13 publications

Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment

Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment

De-anchored Long-term Inflation Expectations in a Low Growth, Low Rate Environment

The COVID-19 Shock and a Fiscal-Monetary Policy Mix in a Monetary Union

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