Effects of state-dependent forward guidance, large-scale asset purchases and fiscal stimulus in a low-interest-rate environment

  • We study the incidence and severity of lower-bound episodes and the efficacy of three types of state-dependent policies—forward guidance about the future path of interest rates, large-scale asset purchases and spending-based fiscal stimulus—in ameliorating the adverse consequences stemming from the effective lower bound on nominal interest rates. In particular, we focus on the euro area economy and examine, using the ECB’s New Area- Wide Model, the consequences of the lower bound both for the near-term economic outlook, characterised by persistently low nominal interest rates and inflation, and in a lasting low-real-interest-rate world. Our findings suggest that, if unaddressed, the lower bound can have very substantial costs in terms of worsened macroeconomic performance. Forward guidance, if fully credible, is most powerful and can largely undo the distortionary effects due to the lower bound. A combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is almost equally effective, in particular when asset purchases enhance the credibility of the forward guidance policy via a signalling effect.

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Author:Günter Coenen, Carlos Montes-Galdón, Frank Smets
URN:urn:nbn:de:hebis:30:3-527882
URL:https://ssrn.com/abstract=3522191
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 639
Series (Serial Number):CFS working paper series (639)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2020
Year of first Publication:2020
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2020/01/20
Tag:Effective lower bound; asset purchases; euro area; fiscal policy; forward guidance; monetary policy
Issue:January 3, 2020
Page Number:52
HeBIS-PPN:458873403
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht