Year: 2026
Type: article
Abstract: In recent years, the nominal interest rate has hit the zero lower bound, thus limiting the ability of monetary policy to facilitate the real economy’s recovery after a slump. To overcome this problem, many central banks have exploited an instrument based on announcements about the future level of interest rates: the so-called “forward guidance” (FG). Considering a binding zero lower bound (ZLB), we investigate to what extent forward guidance can help economic activity recover when monetary policy is in a liquidity trap. Moreover, relying on a welfare measure, we analyze the optimal duration of forward guidance, i.e., for how many additional periods the central bank should announce future interest rates close to zero.
DOI: 10.3390/jrfm19070475
Author: Marco Di Pietro
Institution: Sapienza University of Rome
Language: English
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $1,689
OpenAlex ID: W7166582534