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Conducting monetary policy when interest rates are near zero

Author

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  • Charles T. Carlstrom
  • Andrea Pescatori

Abstract

This Economic Commentary explains the concerns that are associated with the combination of deflation, low economic activity, and zero nominal interest rates and describes how monetary policy might be conducted in such a situation. We argue that avoiding expectations of deflation is key and that the monetary authority needs to demonstrate an unequivocal commitment to preventing deflation. We also argue that price-level targeting might be a good device for communicating such a commitment.

Suggested Citation

  • Charles T. Carlstrom & Andrea Pescatori, 2009. "Conducting monetary policy when interest rates are near zero," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    • Handle: RePEc:fip:fedcec:y:2009:i:oct
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    File URL: https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/economic-commentary-archives/2009-economic-commentaries/ec-20091009-conducting-monetary-policy-when-interest-rates-are-near-zero.aspx
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    Cited by:

    1. Tamim Bayoumi & Giovanni Dell'Ariccia & Karl F Habermeier & Tommaso Mancini Griffoli & Fabian Valencia, 2014. "Monetary Policy in the New Normal," IMF Staff Discussion Notes 14/3, International Monetary Fund.

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    Keywords

    Interest rates; Monetary policy;

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