The remaining components of the policy package could thus be treated as a residual, after the setting of the short-term interest rate is determined, and be calibrated such that they attain the overall degree of accommodation indicated by the policy prescriptions originating from the Taylor rule. But, for the most part, our policy instruments act as strong complements.
For instance, the downward pressure that APP exerts on term premia is strengthened by the negative interest rate policy and the rate forward guidance that offers an expected horizon for continuing that policy in the near term. Negative remuneration on banks’ excess reserves induces lenders and other investors holding cash reserves to diversify away from liquidity into longer-dated assets.