Three Lessons for Monetary Policy in a Low-Inflation Era

The zero lower bound on nominal interest rates constrains the central bank's ability to stimulate the economy during downturns.We use the FRB US model to quantify the e ects of the bound on macroeconomic stabilization and to explore how policy can be designed to minimize these e ects.During particularly severe contractions, open-market operations alone may be insu cient to restore equilibrium; some other stimulus is needed.Abstracting from such rare events, if policy follows the Taylor rule and targets a zero in ation rate, there is a signi cant increase in the variability of output but not in ation.However, a simple modi cation to the Taylor rule yields a dramatic reduction in the detrimental e ects of the zero bound.