Reflecting recent economic developments in Japan, there is a growing interest in how monetary policy should be conducted under low inflation and nominal interest rates. Among several proposed solutions, the conventional wisdom seems to be to commit to lower future short-term nominal interest rates through some variation on price-level targeting. We confirm the effectiveness of such a policy in a large-scale dynamic general equilibrium model: the Japanese Economic Model. However, uncertainty - which affects how monetary policy should be conducted - increases in the presence of the zero bound on nominal interest rates. We posit that the increased uncertainty may explain why the central bank cannot fully commit to a certain fully specified policy scheme far into the future when the economy is caught in a liquidity trap.
ASJC Scopus subject areas
- Geography, Planning and Development