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Issues Regarding the Use of the Policy Rate Tool
We review two nonstandard uses of the policy rate tool, which provide additional stimulus when interest rates are close to or at the effective lower bound—forward guidance and negative interest rate policy. In particular, we survey the use of these tools since the star otf the Great Recession, review evidence of their effectiveness, and discuss key considerations that confront monetary policymakers while using them.
Did the Federal Reserve Break the Phillips Curve? Theory and Evidence of Anchoring Inflation Expectations
In a macroeconomic model with drifting long-run inflation expectations, the anchoring of inflation expectations manifests in two testable predictions. First, expectations about inflation far in the future should no longer respond to news about current inflation. Second, better-anchored inflation expectations weaken the relationship between unemployment and inflation, flattening the reduced-form Phillips curve. We evaluate both predictions and find that communication of a numerical inflation objective better anchored inflation expectations in the United States but failed to anchor expectations ...