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Mind the Gap When Exiting Low-for-Long

Author

Listed:
  • Wataru Hagio

    (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: wataru.hagio@boj.or.jp))

  • Daisuke Ikeda

    (Head of Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: daisuke.ikeda@boj.or.jp))

  • Koji Takahashi

    (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouji.takahashi-2@boj.or.jp))

  • Keisuke Yoshida

    (Research and Statistics Department, Bank of Japan (E-mail: keisuke.yoshida@boj.or.jp))

Abstract

Prolonged low interest rates can be stimulative while leading agents to believe rates will remain lower for longer than central banks intend. When rates rise, however, agents may perceive this as surprise tightening, causing economic contraction. To articulate this unintended effect, this paper develops a New Keynesian model with learning and forward guidance. It finds that prolonged low rates lower agents' perceived nominal neutral rate, and the correction of their belief during rate hikes precipitates economic downturns. Low credibility about forward guidance amplifies this impact. Empirical support is provided by estimating a perceived monetary policy rule using professional forecast data.

Suggested Citation

  • Wataru Hagio & Daisuke Ikeda & Koji Takahashi & Keisuke Yoshida, 2026. "Mind the Gap When Exiting Low-for-Long," IMES Discussion Paper Series 26-E-02, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:26-e-02
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    File URL: https://www.imes.boj.or.jp/research/papers/english/26-E-02.pdf
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    References listed on IDEAS

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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
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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