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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.

When countries are hit by supply shocks, central banks often face the dilemma of either looking through such shocks or reacting to them to ensure that inflation expectations remain anchored. In this paper, we propose a tractable framework to capture this dilemma and then explore optimal policy under a range of assumptions about how expectations are formed.

The COVID-19 pandemic uncovered policy challenges related to the economic measures that were taken to support the economy. Two years later, we attempt to identify the broader impact of these measures and research that needs to follow.

Using a nonlinear New Keynesian model with a financial accelerator, we show that financial frictions generate large state-dependent amplification effects. Shocks propagate more strongly in periods of financial stress. We propose an endogenous regime-switching DSGE framework for efficient estimation and improved model fit.

How should central banks design monetary policy in stable times and during recessions? We run a horse race between five monetary policy frameworks in an experimental laboratory to assess how well the different approaches can manage the public’s expectations and stabilize the economy.

This paper evaluates the effectiveness of macroprudential policies when regulations are uneven across mortgage lender types. We look at credit tightening that results from macroprudential regulations and examine how much of it is counteracted by credit shifting to unregulated lenders. We also study the impact of monetary policy tightening when some lenders are unregulated.

Because of the COVID-19 pandemic, public interest in the Bank’s balance sheet and, more specifically, the size of settlement balances, has grown. This paper deconstructs the concept of settlement balances and provides some context on their history, current state and possible future evolution.

We measure soft information contained in the congressional testimonies of U.S. Federal Reserve Chairs and analyze its effect on financial markets. Increases in the Chair’s text-, voice-, or face-emotion indices during these testimonies generally raise stock prices and lower their volatility.

Consumption inequality and a low interest rate environment are two important trends in today’s economy. But the implications they may have—and how those implications interact—within different monetary policy frameworks are not well understood. We study the ranking of alternative frameworks that take these trends into account.

Central banks in many advanced economies enjoy a high degree of independence, which protects monetary policy decisions from political influence. But how should independent central banks react if pressured by fiscal policy-makers? We examine whether a central bank should design a monetary policy framework that prescribes acting conditionally on how fiscal policy behaves.