DP11117 Forward guidance and "lower for longer": The case of the ECB

Author(s): Tilman Bletzinger, Volker Wieland
Publication Date: February 2016
Keyword(s): European Central Bank, forward guidance, interest rates, Monetary policy, zero bound
JEL(s): E43, E47, E52, E58
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11117

A number of contributions to research on monetary policy have suggested that policy should be asymmetric near the lower bound on nominal interest rates. As inflation and economic activity decline, policy should ease more aggressively than it would in the absence of the lower bound. As activity recovers and inflation picks up, the central bank should act to keep interest rates lower for longer than without the bound. In this note, we investigate to what extent the policy easing implemented by the ECB since summer 2013 mirrors the rate recommendations of a simple policy rule or deviates from it in a way that indicates a "lower for longer" approach to policy near zero interest rates.