Kevin Lansing, 02 October 2017

Is the ZLB self-fulfilling? In this video, Kevin Lansing explains how expectations about the inflation rate can have an impact on the central bank’s ability to use the ZLB. This video was recorded in July 2017 at a macroeconomics conference organised by the Bank of England.

Alex Haberis, Richard Harrison, Matt Waldron, 21 September 2017

In New Keynesian models, a promise to hold interest rates lower in the future has powerful effects on economic activity and inflation today. This result relies on a strong link between expected future policy rates and current activity, and also a belief that the policymaker will make good on the promise. This column argues that a tension between both of these creates a paradox – the stronger the expectations channel, the less likely it is that people will believe the promise in the first place. As a result, forward guidance promises are much less powerful than standard analysis suggests.

Marc Dordal i Carreras, Olivier Coibion, Yuriy Gorodnichenko, Johannes Wieland, 21 September 2016

Models that estimate optimal inflation rates struggle to accurately account for interest rates reaching the zero lower bound, due to the lack of historical data available. This column suggests periods of hitting the zero lower bound are longer than previously thought, and models the optimal inflation rate target on this. Given the uncertainty associated with measuring the historical frequency and duration of such episodes, the wide range of plausible optimal inflation rates implies that any inflation targets should be treated with caution.

Maurice Obstfeld, Rabah Arezki, Gian Maria Milesi-Ferretti, 13 April 2016

Oil prices have fallen sharply and remained persistently low, but the expected demand boost has not materialised. This column notes that when nominal interest rates are pinned at zero, lower inflation due to a drop in oil prices raises real interest rates, working against the traditional positive income effects. Dangers arise from the possibility of unanchored inflation expectations and dislocations – including corporate and sovereign defaults – that could spook already jittery financial markets. To combat such negative loops, demand support by the global community – along with a range of country-specific structural and financial-sector reforms – is urgent.

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