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Journal Article
Measuring the Stance of Monetary Policy on and off the Zero Lower Bound
Taeyoung Doh and Jason Choi propose a new ?shadow? short-term interest rate to measure the stance of policy when the federal funds rate was constrained by the zero lower bound.
Working Paper
The dynamic effects of forward guidance shocks
We examine the macroeconomic effcts of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using unexpected changes in futures contracts around monetary policy announcements. We then embed these policy shocks in a vector autoregression to trace out their macroeconomic implications. Forward guidance shocks that lower expected future policy rates lead to moderate increases in economic activity and inflation. After examining forward guidance shocks in the data, we show that a standard model of nominal price rigidity can reproduce our empirical ...
Working Paper
Household Debt and the Heterogeneous Effects of Forward Guidance
We develop an incomplete-markets heterogeneous agent New-Keynesian (HANK) model in which households are allowed to lend and borrow, subject to a borrowing constraint. We show that, in this framework, forward guidance, that is the promise by the central bank to lower future interest rates, can be a powerful policy tool, especially when the economy is in a liquidity trap. In our model, the power of forward guidance is amplified by three redistributive channels, absent in a representative agent new- Keynesian model (RANK) or in a HANK model without private debt. First, expected lower rates imply ...
Working Paper
Learning and Misperception: Implications for Price-Level Targeting
Monetary policy strategies that target the price level have been advocated as a more effective way to provide economic stimulus in a deep recession when conventional monetary policy is limited by the zero lower bound on nominal interest rates. Yet, the effectiveness of these strategies depends on a central bank's ability to steer agents' expectations about the future path of the policy rate. We develop a flexible method of learning about the central bank's policy rule from observed interest rates that takes into account the limited informational content at the zero lower bound. When agents ...
Working Paper
The Effects of Foreign Shocks when Interest Rates are at Zero
In a two-country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound on policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. Departing from many of the existing closed-economy models, the duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the trap, implying more contractionary effects for the home country. The home economy is more vulnerable to adverse foreign shocks if ...
Working Paper
Endogenous volatility at the zero lower bound: implications for stabilization policy
At the zero lower bound, the central bank's inability to offset shocks endogenously generates volatility. In this setting, an increase in uncertainty about future shocks causes significant contractions in the economy and may lead to non-existence of an equilibrium. The form of the monetary policy rule is crucial for avoiding catastrophic outcomes. State-contingent optimal monetary and fiscal policies can attenuate this endogenous volatility by stabilizing the distribution of future outcomes. Fluctuations in uncertainty and the zero lower bound help our model match the unconditional and ...
Working Paper
From Taylor's Rule to Bernanke's Temporary Price Level Targeting
Bernanke's strategies for integrating forward guidance into conventional instrument rules anticipate that effective lower bound (ELB) episodes may become part a regular occurrence and that monetary policy should recognize this likelihood (Bernanke (2017a); Bernanke (2017b)). Bernanke's first proposal is a form of flexible temporary price level targeting (TPLT), in which a lower-for-longer policy path is prescribed through a ?shadow rate?. This shadow rate accounts for cumulative shortfalls in inflation and output relative to exogenous trends, and the policy rate is kept at the ELB until the ...
Working Paper
Seven Fallacies Concerning Milton Friedman's \"The Role of Monetary Policy\"
This paper analyzes Milton Friedman's (1968) article "The Role of Monetary Policy," via a discussion of seven fallacies concerning the article. These fallacies are: (1) "The Role of Monetary Policy" was Friedman?s first public statement of the natural rate hypothesis. (2) The Friedman-Phelps Phillips curve was already presented in Samuelson and Solow's (1960) analysis. (3) Friedman's specification of the Phillips curve was based on perfect competition and no nominal rigidities. (4) Friedman?s (1968) account of monetary policy in the Great Depression contradicted the Monetary History's ...
Working Paper
A Promised Value Approach to Optimal Monetary Policy
This paper characterizes optimal commitment policy in the New Keynesian model using a novel recursive formulation of the central bank's infinite horizon optimization problem. In our recursive formulation motivated by Kydland and Prescott (1980), promised inflation and output gap---as opposed to lagged Lagrange multipliers---act as pseudo-state variables. Using three well known variants of the model---one featuring inflation bias, one featuring stabilization bias, and one featuring a lower bound constraint on nominal interest rates---we show that the proposed formulation sheds new light on the ...
Working Paper
Gauging the Ability of the FOMC to Respond to Future Recessions
Current forecasts suggest that the federal funds rate in the future is likely to level out at a rather low level by historical standards. If so, then the FOMC will have less ability than in the past to cut short-term interest rates in response to a future recession, suggesting a risk that economic downturns could turn out to be more severe as a result. However, simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully ...