Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit
Hess Chung
Etienne Gagnon
Taisuke Nakata
Matthias Paustian
Bernd Schlusche
James Trevino
Diego Vilan
Wei Zheng
Abstract

We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in response to the Global Financial Crisis are modestly effective in speeding up the labor market recovery and return of inflation to 2 percent following an economic slump. However, these policies have only small effects in limiting the initial rise in the unemployment rate during a recession because of transmission lags. As with any model-based analysis, we also discuss a number of c aveats regarding our results.


Download Full text
Cite this item
Hess Chung & Etienne Gagnon & Taisuke Nakata & Matthias Paustian & Bernd Schlusche & James Trevino & Diego Vilan & Wei Zheng, Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2019-003, 01 Feb 2019.
More from this series
JEL Classification:
Subject headings:
Keywords: Effective lower bound ; Federal Reserve balance sheets ; Forward guidance ; Large-scale asset purchases ; Monetary policy
DOI: 10.17016/FEDS.2019.003
For corrections, contact FRB Librarian ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal