An increased incidence of hitting the zero bound leads to greater macroeconomic instability. Chart 2 illustrates this implication. As seen in the previous chart, in a low-inflation environment, where interest rates are closer to zero on average, the ability of policymakers to stabilize the economy is limited. As a result, the lower the objective for inflation, the less stable output, inflation, or both, will be. And indeed,the model suggests output stabilization is problematic in a very low inflation regime. For example, if the inflation objective is lowered from 4 to 0 percent, the variability of the output gap (dashed line) —defined as the difference between actual and potential real GDP—would rise 20 percent (when measured in terms of standard deviation). In contrast,the choice of inflation objective, even one close to zero, has little effect
on inflation stability (bold line).