Euro Area Faces Economic Risks as Interest Rates Hit Bottom
The article examines different monetary policy strategies in the Euro area when interest rates are low. By using simulations with a DSGE model, the researchers found that the costs of the effective lower bound on interest rates increase as the monetary policy space decreases. A point inflation target is more effective than a target range, and low-for-long rules work well when the monetary space is small but can lead to more economic volatility with a larger space.