The risk of hitting the zero or effective lower bound (ZLB/ELB) in the future reduces current inflation through the expectations channel, a paper published by the US Federal Reserve finds.
Timothy Hills, Taisuke Nakata and Sebastian Schmidt examine how the risk of hitting the ELB in the future impacts a central bank’s ability to meet its inflation objective today. They use data from 1995 to 2018.
The researchers find that the risk of hitting the ELB causes inflation to undershoot the target by
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