Costly Monetary Policy at Zero Bound Delays Recovery, Increases Welfare Losses
Central banks face challenges when interest rates are at zero. In a cost channel economy, keeping rates low for longer is needed for recovery. There is a trade-off between inflation and output gap in these economies. Committing to low rates helps end the zero interest regime sooner. However, cost channels lead to high welfare losses under both policies. Ignoring cost channels can underestimate these losses.