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Working Paper
Escaping the Great Recession
Melosi, Leonardo; Bianchi, Francesco (2014-08-01)
While high uncertainty is an inherent implication of the economy entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policymakers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a new-Keynesian model in which the monetary/fiscal policy mix can change over time and zero-lower-bound episodes are recurrent. Given that policymakers? behavior is constrained at the zero lower bound, beliefs about the exit strategy play a key role. Announcing a period of austerity is detrimental in the short ...
Working Paper Series , Paper WP-2014-17

Working Paper
Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?
Christensen, Jens H. E.; Rudebusch, Glenn D. (2013-12-17)
Recent U.S. Treasury yields have been constrained to some extent by the zero lower bound (ZLB) on nominal interest rates. In modeling these yields, we compare the performance of a standard affine Gaussian dynamic term structure model (DTSM), which ignores the ZLB, and a shadow-rate DTSM, which respects the ZLB. We find that the standard affine model is likely to exhibit declines in fit and forecast performance with very low interest rates. In contrast, the shadow-rate model mitigates ZLB problems significantly and we document superior performance for this model class in the most recent period.
Working Paper Series , Paper 2013-39

Working Paper
Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia
Hills, Timothy S.; Nakata, Taisuke (2014-11-20)
The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends. This in turn dampens the expansionary effects of the government spending during the recession via expectations. In our baseline calibration, the output multiplier at the ZLB is 2.5 when the ...
Finance and Economics Discussion Series , Paper 2014-107

Speech
Comments on “A Skeptical View of the Impact of the Fed’s Balance Sheet”: remarks at the 2018 U.S. Monetary Policy Forum, New York City
Dudley, William (2018-02-23)
Remarks at the 2018 U.S. Monetary Policy Forum, New York City.
Speech , Paper 275

Working Paper
The Contribution of Foreign Holdings of U.S. Treasury Securities to the U.S. Long-Term Interest Rate: An Empirical Investigation of the Impact of the Zero Lower Bound
Zhang, Yixiang; Martínez García, Enrique (2024-09-25)
We find empirical evidence of a possible structural break in the relationship between the foreign holdings of U.S. Treasury securities and the U.S. long-term interest rate occurring at the time when U.S. monetary policy became constrained at the zero-lower bound (ZLB). The estimated marginal effect of the foreign holdings ratio on the U.S. long-term interest rate, particularly its long-run effect, appears to have become stronger during the ZLB regime than it was before. We argue that the leading explanation of this apparent break is the nonlinearity introduced by the ZLB. Motivated by theory, ...
Globalization Institute Working Papers , Paper 430

Working Paper
How Optimal Was U.S. Monetary Policy at the Zero Lower Bound?
Bundick, Brent; Smith, Andrew Lee; Hotz, Logan (2023-12-01)
The zero lower bound on nominal interest rates can generate substantial downward pressure on longer-term inflation expectations. We use data on interest rate options and inflation compensation to estimate how the probability that the zero lower bound will bind in the future has weighed on inflation expectations in the United States. Over the 2008–19 period, we estimate that the zero lower bound imparted only a small drag on longer-term inflation expectations of around 10 basis points. We argue that the Federal Reserve's forward guidance and large-scale asset purchases largely offset the ...
Research Working Paper , Paper RWP 23-14

Working Paper
Banks' search for yield in the low interest rate environment: a tale of regulatory adaptation
Wang, J. Christina (2017-06-01)
This paper examines whether the low interest rate environment that has prevailed since the Great Recession has compelled banks to reach for yield. It is important to recognize that banks can take on a variety of risks that offer higher yields today but incur different forms of future losses. Some losses, such as mark-to-market losses due to yield increases, can be avoided with accounting treatments whereas others, chiefly credit losses, cannot. A simple model shows that a bank?s incentive to take on risks for which potential future losses can be managed, such as interest rate risk, is ...
Working Papers , Paper 17-3

Report
Monetary policy frameworks and the effective lower bound on interest rates
Mertens, Thomas M.; Williams, John C. (2019-01-01)
This paper applies a standard New Keynesian model to analyze the effects of monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will become anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for ...
Staff Reports , Paper 877

Speech
Panel remarks at the Brookings Institution
Dudley, William (2015-10-15)
Remarks at The Fed at a crossroads: Where to go next?, Brookings Institution, Washington, D.C.
Speech , Paper 181

Working Paper
Some unpleasant properties of loglinearized solutions when the nominal rate is zero
Waki, Yuichiro; Braun, R. Anton; Korber, Lena Mareen (2012)
Does fiscal policy have large and qualitatively different effects on the economy when the nominal interest rate is zero? An emerging consensus in the New Keynesian (NK) literature is that the answer to this question is yes. Evidence presented here suggests that the NK model's implications for fiscal policy at the zero bound may not be all that different from its implications for policy away from it. For a range of empirically relevant parameterizations, employment increases when the labor tax rate is cut and the government purchase multiplier is less than 1.05.
FRB Atlanta Working Paper , Paper 2012-05

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