A simple way to overcome the zero lower bound of interest rates for central banks: Evidence from the Fed and the ECB within the financial crisis

In this paper, we investigate how Fed and ECB monetary policy changed within the financial crisis of 2007-2010. We argue that due to the very low interest rates classical monetary policy rules like, e.g., the Taylor rule could lead to false conclusions. We propose a new way of conducting monetary policy when the zero lower bound becomes binding via shaping the inflation expectations. Our results indicate that using this modified Taylor rule shows similar tendencies in the reaction coefficients as the standard Taylor rule at least if no interest smoothing term is included.financial crisis; Federal Reserve; European Central Bank; quantitative easing; inflation expectations; Taylor rule; zero lower bound; interest rates; central banks; monetary policy.