DP2945 | Monetary Policy Issues in a Low Inflation Environment


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One of the most striking macroeconomic phenomena in recent decades has been the achievement of rather low and more stable rates of inflation in many countries. Consequently, the main goal of this Paper is to offer an overview of the main policy issues arising in a low inflation environment and their practical relevance so as to identify the main challenges facing central bankers in such an environment. The Paper asks the following questions: To what extent are the public's attitudes towards price stability relative to other economic objectives ? like unemployment ? likely to change over time? How can the effectiveness of monetary policy change as a result of the non-linearities associated with the zero bound on nominal interest rates, the supposedly higher degree of downward real wage rigidity and, in general, the presence of downward nominal wage or price rigidities? What does the low inflation environment imply about the relative importance and effects of supply shocks, ?non-monetary? demand shocks and ?monetary? demand shocks? What sort of indicators are like to be more useful to the central bank for assessing inflationary pressures and, in particular, should asset prices play a bigger role in the conduct of monetary policy?