This paper employs stochastic simulations of the New Area- Wide Model—a microfounded open-economy model developed at the ECB—to investigate the consequences of the zero lower bound on nominal interest rates for the evolution of risks to price stability in the euro area during the recent...

We estimate a reaction function for the European Central Bank (ECB) using forecasts of economic growth and inflation as regressors. We detect a shift after Lehman Brothers failed in September 2008 when the pre-crisis reaction function indicates that the zero lower bound may become a constraint....