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RWP 23-14, December 2023

The zero lower bound on nominal interest rates can generate substantial downward pressure on longer-term inflation expectations. We use data on interest rate options and inflation compensation to estimate how the probability that the zero lower bound will bind in the future has weighed on inflation expectations in the United States. Over the 2008–19 period, we estimate that the zero lower bound imparted only a small drag on longer-term inflation expectations of around 10 basis points. We argue that the Federal Reserve's forward guidance and large-scale asset purchases largely offset the potential disinflationary effects of the zero lower bound, even prior to the formal adoption of an average inflation-targeting framework.

JEL classifications: E32, E52

Article Citation

  • Bundick, Brent, Logan Hotz, and A. Lee Smith. 2023. “How Optimal Was U.S. Monetary Policy at the Zero Lower Bound?” Federal Reserve Bank of Kansas City, Research Working Paper no. 23-14, December. Available at External Link


Brent Bundick

Sr. Research and Policy Advisor

Brent Bundick is a Senior Research and Policy Advisor in the Economic Research Department of the Federal Reserve Bank of Kansas City. He rejoined the Department in 2014 after com…

A. Lee Smith

Senior Vice President

Andrew Lee Smith is a Senior Vice President and Economist at the Federal Reserve Bank of Kansas City. In this role, Lee has oversight of macroeconomic research and serves as an a…