Zero Interest Rate Policy Uncertainty Amplifies Economic Declines, Study Finds
The study looks at how changes in monetary policy affect the economy when interest rates hit zero. By using a model that considers uncertainty and the zero lower bound constraint, the researchers found that when facing negative shocks, uncertainty can lead to bigger drops in output and prices. This means that in times of deflation, the economy may be worse off than previously thought. The study suggests that a passive policy approach can help increase output and inflation when interest rates are stuck at zero.