Lessons we have learned from the crisis, by Jordi Galí
What can central banks do when they reach the zero lower bound for nominal interest rates?
“Central banks [...] can exert an influence by trying to convince investors that they’ll keep interest rates very low for much longer than the macroeconomic circumstances would justify.”
“This should lead to a reduction in long-term interest rates, which should be reflected – to the extent that the financial system is working at least minimally as it should – in the rates charged on loans provided by banks.”
“So forward guidance was the second unconventional policy tool, and it’s clearly unconventional because all central banks had to do was make announcements about measures that might be taken in the future, without taking any decision in the present.”