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

Abstract

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.