While recent experience indicates zero lower bound (ZLB) is a bigger problem than believed, but forward guidance, large-scale asset purchases, and sometimes fiscal policy can offset the issues, Federal Reserve Bank of San Francisco President John C. Williams wrote in a paper presented Thursday.
"On one side of the ledger, recent experience proves that the ZLB is a worse problem than previously imagined; consideration of the implications of the ZLB in the future will need to take this into account," Williams wrote in the paper presented in Washington, D.C., and released by the Fed. "On the other side, forward guidance, large-scale asset purchases, and, in some cases, fiscal policy have proven to be effective partial antidotes for the ZLB. Even if one views the risks from the ZLB to be greater than before, there are alternatives to raising the inflation target. More-effective financial regulation may diminish the potential for a severe crisis for the foreseeable future."
Also, he said, price-level or nominal GDP targeting could cut the costs of ZLB.
"What is needed now, like the surge in research on the ZLB in the decade before the crisis, is a new flurry of research on these issues that takes into account the lessons of the past six years, and helps provide concrete prescriptions for future policymakers," Williams said.
