The macroeconomic risks of undesirably low inflation |
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| Institution: | 1. Bank of Canada, 234 Wellington Street, Ottawa, ON K1A 0G9, Canada;2. International Monetary Fund, United States;3. Gothenburg University, Sweden;4. CEPR, United Kingdom;5. Goethe University Frankfurt, Theodor-W.-Adorno-Platz 3, 60323 Frankfurt am Main, Germany;6. Halle Institute for Economic Research (IWH);2. Centre for Economic Policy Research (CEPR), London, United Kingdom;3. ERUDITE, Université Paris-Est Créteil (UPEC), Créteil, France |
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| Abstract: | This paper investigates the macroeconomic risks associated with undesirably low inflation using a medium-sized New Keynesian model. We consider different causes of persistently low inflation, including a downward shift in long-run inflation expectations, a fall in nominal wage growth, and a favorable supply-side shock. We show that the macroeconomic effects of persistently low inflation depend crucially on its underlying cause, as well as on the extent to which monetary policy is constrained by the zero lower bound. Finally, we discuss policy options to mitigate these effects. |
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| Keywords: | Disinflation Monetary policy Liquidity trap DSGE model |
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