Monetary policy tweaks could prevent economic downturns in low-inflation era
In a low-inflation era, when interest rates are near zero, central banks face challenges in stimulating the economy during downturns. By using a model, researchers found that traditional policies may not be enough to restore economic balance in severe contractions. However, adjusting the Taylor rule to target slightly higher inflation rates can significantly reduce the negative effects of the zero lower bound on interest rates. This modification leads to less variability in output without causing a significant increase in inflation.