Monetary policy strategies in the New Normal: A model-based analysis for the euro area

A calibrated New Keynesian model of the euro area is used to evaluate stabilization properties alternative monetary policy strategies when natural rate interest low (“new normal”) and probability reaching effective lower bound (ELB) non-negligible. Price level targeting most strategy in terms stabilizing inflation output reducing duration frequency ELB episodes. Temporary price also mitigating constraint, although its are inferior those targeting. Backward-looking average performs well preferable The effectiveness these hinges upon commitment a central bank keeping “lower for longer” influenced by agents’ expectation formation mechanism.