Zero interest rates could lead to increased economic volatility, study finds.
Monetary policy can help stabilize the economy by lowering interest rates, but the zero lower bound can limit this. Severe contractions may require both monetary and fiscal policy. The zero bound can lead to higher interest rates and lower inflation, but adjusting policy rules can counteract this. In a low-inflation environment, the zero bound can increase volatility in resource utilization and inflation, but adjusting policy rules can mitigate these effects.