Must-read: Stan Fischer: “Monetary Policy, Financial Stability, and the Zero Lower Bound I”

Must-Read: Very disappointing to me that both nominal GDP targeting and price path level targeting appear to be completely off of Stan Fischer’s radar:

Stan Fischer: Monetary Policy, Financial Stability, and the Zero Lower Bound I: “Are We Moving Toward a World With a Permanently Lower Long-Run Equilibrium Real Interest Rate?…

…Research that was motivated in part by attempts that began some time ago to specify the constant term in standard versions of the Taylor rule has shown a declining trend in estimates of r*. That finding has become more firmly established since the start of the Great Recession and the global financial crisis…. A lower level of the long-run equilibrium real rate suggests that the frequency and duration of future episodes in which monetary policy is constrained by the ZLB will be higher than in the past. Prior to the crisis, some research suggested that such episodes were likely to be relatively infrequent and generally short lived. The past several years certainly require us to reconsider that basic assumption….Conducting monetary policy effectively at the ZLB is challenging, to say the least….

The answer to the question ‘Will r* remain at today’s low levels permanently?’ is that we do not know….

Raising the Inflation Target…. The welfare costs of high and variable inflation could be substantial. For example, more variable inflation would make long-run planning more difficult for households and businesses….

Negative Interest Rates: Another possible step would be to reduce short-term interest rates below zero if needed to provide additional accommodation. Our colleagues in Europe are busy rewriting economics textbooks on this topic as we speak…. It is unclear how low policy rates can go before cash holdings rise or other problems intensify, but the European experience has certainly shown that zero is not the effective lower bound in those countries….

Raising the Equilibrium Real Rate: An even more ambitious approach to ease the constraints posed by the zero lower bound would be to take steps aimed at raising the equilibrium real rate. For example, expansionary fiscal policy would boost the equilibrium real rate…. The Federal Reserve’s asset purchases… have reduced the level of the term premium….

Eliminating the ZLB Associated with Physical Currency….

None of these options for dealing with the difficulties of the ZLB suggest that it will be easy either to raise the equilibrium real rate or to mitigate the constraints associated with the ZLB…