E37 - Forecasting and Simulation: Models and Applications

• Harnessing the benefit of state-contingent forward guidance

  Staff Analytical Note 2022-13 Vivian Chu, Yang Zhang

  A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Central bank research, Economic models, Monetary policy framework, Monetary policy transmission JEL Code(s): E, E2, E27, E3, E37, E4, E5, E52, E58