The paper describes the monetary policy strategies adopted by central banks in the main advanced economies in the past two decades. Then, using a New Keynesian model calibrated to the euro area, it assesses the effectiveness of alternative monetary policy strategies in an environment, such as the current one, characterized by a relatively high probability that the policy rate hits its effective lower bound (ELB).
All central banks under review target a small and positive inflation rate (typically 2%). In most cases, they set a point target, in some a range or a point surrounded by a band. According to our simulations, under an inflation targeting regime the inflation rate remains, on average, below target when the policy rate is close to the ELB; regimes according to which monetary policy takes into account the past inflation shortfalls from the target or reacts more aggressively to disinflationary shocks are better able to achieve the target.
