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Figure 1: Unconditional Distribution of Inflation

Note: Authors' calculation as described in Hills, Nakata, and Schmidt (2016)

This histogram shows the unconditional distribution of inflation from the empirical model described in Hills, Nakata, and Schmidt (2016). The dashed black vertical line marks the central bank's inflation target (2 percent); the solid black vertical line marks the risky steady state inflation (1.71 percent); the solid red vertical line marks the average inflation (1.66 percent). The histogram shows that the center of the distribution (the risky steady state inflation) is below the target rate of inflation and that the average inflation is below the center of the distribution.

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Figure 2: The Effect of the ELB Risk on Projections

Note: Authors' calculation as described in Hills, Nakata, and Schmidt (2016)

	Policy Rate		Inflation		Output Gap
Quarter	With ELB Risk	Without ELB Risk	With ELB Risk	Without ELB Risk	With ELB Risk	Without ELB Risk
1	0.13	0.13	0.50	0.50	-7.00	-7.00
2	0.13	0.13	0.54	0.54	-8.31	-7.48
3	0.13	0.13	0.62	0.63	-7.81	-6.44
4	0.13	0.13	0.72	0.75	-6.59	-4.89
5	0.13	0.13	0.83	0.87	-5.17	-3.33
6	0.13	0.13	0.94	0.98	-3.80	-1.95
7	0.13	0.13	1.04	1.08	-2.59	-0.83
8	0.13	0.13	1.13	1.17	-1.57	0.01
9	0.13	0.13	1.20	1.26	-0.75	0.61
10	0.13	0.13	1.28	1.33	-0.12	1.03
11	0.13	0.13	1.33	1.40	0.34	1.25
12	0.13	0.65	1.39	1.46	0.65	1.28
13	0.13	1.17	1.43	1.51	0.83	1.21
14	0.56	1.60	1.47	1.56	0.87	1.12
15	1.01	1.96	1.50	1.61	0.82	1.02
16	1.38	2.25	1.53	1.64	0.76	0.92
17	1.67	2.49	1.55	1.68	0.69	0.83
18	1.91	2.69	1.57	1.71	0.63	0.76
19	2.10	2.86	1.58	1.74	0.58	0.69
20	2.26	3.00	1.60	1.77	0.54	0.63
21	2.38	3.11	1.61	1.79	0.51	0.57
22	2.49	3.21	1.62	1.81	0.48	0.52
23	2.58	3.30	1.63	1.83	0.46	0.48
24	2.65	3.37	1.64	1.85	0.44	0.43
25	2.71	3.43	1.65	1.86	0.43	0.40
26	2.76	3.48	1.66	1.88	0.42	0.36
27	2.80	3.52	1.66	1.89	0.41	0.33
28	2.84	3.55	1.67	1.90	0.40	0.30
29	2.87	3.59	1.67	1.91	0.39	0.27
30	2.89	3.61	1.68	1.92	0.39	0.25
31	2.92	3.63	1.68	1.93	0.38	0.22
32	2.94	3.65	1.68	1.94	0.37	0.20
33	2.95	3.67	1.69	1.94	0.37	0.18
34	2.96	3.68	1.69	1.95	0.36	0.17
35	2.98	3.69	1.69	1.95	0.36	0.15
36	2.99	3.70	1.69	1.96	0.36	0.13
37	2.99	3.71	1.69	1.96	0.35	0.12
38	3.00	3.72	1.69	1.97	0.35	0.11
39	3.01	3.72	1.70	1.97	0.35	0.10
40	3.01	3.73	1.70	1.97	0.34	0.09

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Figure 3: Long-Run Policy Rate and Deflationary Bias

Note: Authors' calculation as described in Hills, Nakata, and Schmidt (2016)

DSS Policy Rate	Probability of being at the ELB	RSS Inflation With ELB Constraint	RSS Inflation Without ELB Constraint	RSS Output Gap With ELB Constraint	RSS Output Gap Without ELB Constraint	RSS Policy Rate With ELB Constraint	RSS Policy Rate Without ELB Constraint
3.3500	28.43	1.46	1.88	0.69	0.04	2.14	2.97
3.3750	26.93	1.50	1.88	0.63	0.04	2.24	2.99
3.5000	21.87	1.60	1.88	0.48	0.04	2.58	3.12
3.6250	18.51	1.66	1.88	0.39	0.04	2.83	3.24
3.7500	15.86	1.71	1.88	0.32	0.04	3.04	3.37
3.8750	13.70	1.74	1.88	0.27	0.04	3.23	3.49
4.0000	11.94	1.76	1.88	0.23	0.04	3.40	3.62
4.1250	10.40	1.78	1.88	0.20	0.04	3.56	3.75
4.2500	9.06	1.80	1.88	0.18	0.04	3.72	3.87

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