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A LOT of the proposed solutions to the ZLB rest on r* not being much lower than 0-1%.
Exhibit (1) Raising the inflation target:
r*=-2% means that even with avg inflation of 4%, average nominal rates would hover around 2% and space to cut short rates still really limited. [1/5] https://twitter.com/FedResearch/status/1314257750269071362
Exhibit (1) Raising the inflation target:
r*=-2% means that even with avg inflation of 4%, average nominal rates would hover around 2% and space to cut short rates still really limited. [1/5] https://twitter.com/FedResearch/status/1314257750269071362
Exhibit 2: Bernanke argued last year that QE + forward guidance can make up for inability to cut short rates at the ZLB -- but made it clear that this only works w/ a nominal neutral rate of 2-3% (i.e r* 0%-1%). With r* perhaps -2%, these tools would be vastly insufficient [2/5]
Exhibit 3: If r* is around -2%, going negative with interest rates becomes a pretty serious proposition. Typical recessions have seen rate cuts of 3-4pp below the neutral rate -> we would have to hit -4% or so nominal interest rates to make a dent in even a normal recession [3/5]
Of course this paper is just one estimate -- but if we have pretty substantial uncertainty around the actual level of r*, and if it might be as low as -2% or lower, it seems pretty important to acknowledge the consequences of this. [4/5]
AND, as @LHSummers & I argued last year (and in a forthcoming paper), it's increasingly uncertain that a meaningful concept of the neutral rate even *exists*... casting more doubt on the ability of monetary policy alone to stabilize the economy [5/5] https://www.project-syndicate.org/commentary/central-bankers-in-jackson-hole-should-admit-impotence-by-lawrence-h-summers-and-anna-stansbury-2-2019-08?barrier=accesspaylog
