What the Target Should Be
The Floor Under Everything
A framework that cannot cut when it needs to is not a framework with a problem. It is a different framework.
12 min145 XP available4 challenges
A normal policy rate is the neutral real rate plus the inflation target. Everything below the effective lower bound is unavailable. A typical recession has historically called for around five percentage points of cuts, so the question is simply whether the distance between a normal rate and the floor is five points — and for most of the last fifteen years, in most advanced economies, it was not close.
Easing you cannot deliver
1%
What the balance sheet has to cover
- Room above the bound
- 4%
r* + target − floor
Around 2% historically; estimated near zero through the 2010s
Slightly negative where cash is costly to hold
Find a combination where the framework can deliver the full easing a recession needs
- Try -1% — not yet
- Try 4% — not yet
- Find a combination where the framework can deliver the full easing a recession needs — not yet
Answer to continue.