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Learning Monetary Policy Strategies at the Effective Lower Bound with Sudden Surprises

Author

Listed:
  • Spencer Krane

    (Federal Reserve Bank of Chicago)

  • Leonardo Melosi

    (European University Institute)

  • Matthias Rottner

    (Deutsche Bundesbank)

Abstract

We examine how private sector agents might learn a new monetary strategy introduced while policy rates are at their effective lower bound (ELB) in an environment with large inflationary and deflationary shocks. We consider the adoption of a new asymmetric average inflation targeting rule aimed at countering the disinflationary bias imparted by the ELB. The most crucial time for learning runs from when rates would be near liftoff under the old strategy through early liftoff under the new rule. Recessionary shocks during this time could delay learning while large inflationary shocks could outright stop it, inhibiting the ability of the new strategy to address the costs associated with the ELB. Using the US post-Covid experience as an example, we also find that the monetary policy shocks can have important feedback on the learning process. (Copyright: Elsevier)

Suggested Citation

  • Spencer Krane & Leonardo Melosi & Matthias Rottner, 2026. "Learning Monetary Policy Strategies at the Effective Lower Bound with Sudden Surprises," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 62, November.
    • Handle: RePEc:red:issued:24-134
    DOI: 10.1016/j.red.2026.101367
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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