Today’s Must-Must-Read: Charles Evans et al.: Risk Management for Monetary Policy Near the Zero Lower Bound

Today’s Must-Must-Read: Charles Evans et al.:: Risk Management for Monetary Policy Near the Zero Lower Bound: “Projections have inflation heading back toward target and the labor market continuing to improve….

…There is, however, substantial uncertainty around these projections. How should this uncertainty affect monetary policy? In standard models uncertainty has no effect…. [But] the zero lower bound on nominal interest rates implies that the central bank should adopt a looser policy when there is uncertainty… a delayed liftoff is optimal….
Raising rates early might lead to excessively weak growth… raising rates later might lead to inflation…. Near the zero lower bound, monetary policy tools are strongly asymmetric and can deal with the second scenario much more easily than with the first. We… provide a quantitative evaluation of this….
Finally, we present narratives from Federal Reserve communications that suggest risk management is a longstanding practice, and econometric evidence that the Federal Reserve historically has responded to uncertainty, as measured by a variety of indicators.
http://www.brookings.edu/about/projects/bpea/papers/2015/risk-management-monetary-policy-zero-lower-bound

Originally published at www.bradford-delong.com.