Losing traction? The real effects of monetary policy when interest rates are low

•Monetary transmission to economic activity is substantially weaker when interest rates are low.•The results hold when controlling for non-linearities associated with high debt levels and business cycle recessions.•The well-documented flattening of the Phillips curve was accompanied by a steepening...

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Bibliographic Details
Published in:Journal of international money and finance 2024-03, Vol.141, p.102999, Article 102999
Main Authors: Ahmed, Rashad, Borio, Claudio, Disyatat, Piti, Hofmann, Boris
Format: Article
Language:English
Subjects:
Low interest rates
Monetary policy
Monetary transmission mechanism
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Summary:•Monetary transmission to economic activity is substantially weaker when interest rates are low.•The results hold when controlling for non-linearities associated with high debt levels and business cycle recessions.•The well-documented flattening of the Phillips curve was accompanied by a steepening of the IS Curve as interest rate remained low. Based on a panel of 18 advanced countries starting in 1985, we find that monetary transmission to economic activity is substantially weaker when interest rates are low. The results hold when controlling for potential confounding non-linearities associated with debt levels and the business cycle as well as for the trend decline in equilibrium interest rates. These findings suggest that the observed flattening of the Phillips curve has gone hand in hand with a steepening of the IS curve as interest rates remained persistently low, making monetary policy trade-offs more challenging.
ISSN:0261-5606
1873-0639
DOI:10.1016/j.jimonfin.2023.102999