Monetary policy strategies in the New Normal: A model-based analysis for the euro area

Abstract

A New Keynesian model calibrated to the euro area is used to evaluate the stabilization properties of alternative monetary policy strategies when the natural interest rate is low ('new normal') and the probability of reaching the effective lower bound (ELB) is nonnegligible. Price level targeting is the most effective strategy in terms of stabilizing inflation and output and of reducing the duration and frequency of ELB episodes. Temporary price level targeting is also effective in mitigating the ELB constraint, although its stabilization properties are inferior to those of price level targeting. Backward-looking average inflation targeting performs well and is preferable to inflation targeting. The effectiveness of these alternative strategies hinges upon the commitment of a central bank to keeping the policy rate 'lower for longer' and is influenced by the agents' expectation formation mechanism.

Monetary Policy Strategies for the Euro Area: Optimal Rules in the Presence of the ELB

“…But we contribute to the literature by computing optimal simple rules and showing that the differences in performance with respect to inflation targeting and across makeup strategies are greatly reduced when we use optimized response coefficients. 2 Fourth, while early literature has typically assumed that the policy strategy is fully credible and well understood, see for instance Kiley and Roberts (2017), we contribute to the research pointing to the crucial role of expectations formation in determining the performance of makeup strategies, see Bernanke, Kiley, and Roberts (2019), Amano, Gnocchi, Leduc, and Wagner (2020), Budianto, Nakata, and Schmidt (2020), and Busetti, Neri, Notarpietro, and Pisani (2021. 3 We show that policy promises of lower-for-longer embedded in makeup strategies increase in power the more the model suffers from excess sensitivity of inflation to interest rate expectations -the forward guidance puzzle.…”

Sustainable tourism model in the new normal era

“…The in-depth interviews were conducted with six stakeholders, including the tourism office, tourism awareness groups, Regional Tourism Promotion Board, community leaders, Bromo TenggerSemeru Center, associations of travel companies. The quasi-questionary method is used to find data from tourists (Busetti et al, 2021;Uryu et al, 2021).…”

Business strategy of laying hens towards new normal era

“…The new normal era has also changed all people's habits, one of which is in the selling and purchasing of a product, including how to sell chicken eggs (Widyantara & Sukaatmadja, 2019). In the new normal era, people including laying hens in the Bali Province are required to be flexible because the new normal era contains many very fast changes (Busetti et al, 2021). These changes include changes in the market, changes in consumer behavior.…”