Robust Monetary Policy Under Uncertainty About the Lower Bound

Abstract

Central banks face uncertainty about the true location of the effective lower bound (ELB) on nominal interest rates. We model optimal discretionary monetary policy during a liquidity trap when the central bank designs policy that is robust with respect to the location of the ELB. If the central bank fears the worst-case location of the ELB, monetary conditions will be more expansionary in the period before the liquidity trap.

Lower Bound Uncertainty and Long‐Term Interest Rates

“…This paper uses the same theoretical setting as these earlier papers to study the effects of lower bound uncertainty. Tillmann (2021) also studies lower bound uncertainty but focuses on its implications for robust monetary policy in a model with only short‐term bonds. This paper instead studies the implications of lower bound uncertainty for longer term bond yields.…”

Budget uncertainty in a monetary union

“…This is consistent with the EMU situation where governments face a balanced-budget requirement in the medium term.3 The robust control approach has been introduced into economic models byHansen et al (1999) and Sargent (2005, 2008). A number of recent papers has used this approach to determine the optimal monetary policy in the case where some uncertainty is faced by central bankers (see for instance,Giannoni, 2002Giannoni, , 2007 Tillmann, 2009a,b, 2014, 2019, Woodford, 2010.…”