{'fraction_non_alphanumeric': 0.017857142857142856, 'fraction_numerical': 0.0012458471760797341, 'mean_word_length': 4.790865384615385, 'pattern_counts': {'":': 0, '<': 0, '<?xml version=': 0, '>': 0, 'https://': 0, 'lorem ipsum': 0, 'www.': 0, 'xml': 0}, 'pii_count': 0, 'substrings_counts': 0, 'word_list_counts': {'cursed_substrings.json': 0, 'profanity_word_list.json': 0, 'sexual_word_list.json': 0, 'zh_pornsignals.json': 0}}
Comment on Three Lessons for Monetary Policy in a Low-Inflation Era

This paper by David Reifschneider and John Williams is a useful and innovative analysis of monetary policy problems caused by the lower bound of zero on the nominal interest rate. The authors provide estimates, with the help of a large econometric model, of the size of the output fluctuations and the probability of instability if the Fed had a target inflation rate that was very low and followed a monetary policy rule. They also illustrate, with the help of a very simple model, how the lower bound of zero on the nominal interest rate could cause economic instability. Finally, they propose an innovative modification of simple policy rules that virtually eliminates any increase in output volatility. The modification entails pledging to keep interest rates low in the future in the event that the policy 1ule would call for nominal rate below zero in the present. The authors use the Federal Reserve Board model (FRB/US) of the United States economy to obtain their quantitative estimates. I think it is a good model for this purpose. It is forward looking, dynamic, stochastic, and econometrically estimated. It also has a detailed specification of the monetary transmission mechanism, which starts with changes in the federal funds rate and feeds into long-term rates, exchange rates, and other asset prices. The lower the target inflation rate, the lower will be the average nominal interest rate, and thus, the greater will be the likelihood that the nominal interest rate will hit zero when the model economy is hit by shocks. The authors obtain estimates of the impact of this zero bound using a methodology that is becoming increasingly common in monetary policy evaluation, and which might be called the new normative macroeconomics. They place a policy rule in the model and then simulate it stochastically. In the stochastic simulations of the FRB/US model the shocks are drawn from distributions that match U.S. history over the sample period for the estimation of the model. The simulations show that there is indeed an increase in output variability, but the increase is quite small, especially for target inflation rates of between 1 and 3 percent. They also find that there is a positive, but low, probability of getting stuck in a completely unstable situation. These simulation results should be reassuring to poli-