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Where would the federal funds rate be, if it could be negative?

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  • Ellis W. Tallman
  • Saeed Zaman

Abstract

In the wake of Great Recession, the Federal Reserve engaged in conventional monetary policy actions by reducing the federal funds rate. But soon the rate hit zero, and could go no lower. In such environments, policymakers still think in terms of where the federal funds rate should be, were it possible to go negative. To project the “unconstrained path” of the funds rate—ignoring the zero lower bound—and to identify the key underlying shocks driving that path, we employ a statistical macroeconomic forecasting model. We find that the federal funds rate would have been extremely negative during 2009-2010.

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Bibliographic Info

Article provided by Federal Reserve Bank of Cleveland in its journal Economic Commentary.

Volume (Year): (2012)
Issue (Month): Oct ()
Pages:

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Handle: RePEc:fip:fedcec:y:2012:i:oct12:n:2012-15

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Keywords: Federal funds rate ; Forecasting;

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  1. Banbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2007. "Bayesian VARs with Large Panels," CEPR Discussion Papers 6326, C.E.P.R. Discussion Papers.
  2. Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
  3. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 3-46, 02.
  4. Michael Bauer & Glenn Rudebusch, 2011. "Signals from unconventional monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov.21.
  5. Hess Chung & Jean-Philippe Laforte & David Reifschneider & John C. Williams, 2011. "Have we underestimated the likelihood and severity of zero lower bound events?," Working Paper Series 2011-01, Federal Reserve Bank of San Francisco.
  6. Kenneth Beauchemin & Saeed Zaman, 2011. "A medium scale forecasting model for monetary policy," Working Paper 1128, Federal Reserve Bank of Cleveland.
  7. Titan Alon & Eric Swanson, 2011. "Operation Twist and the effect of large-scale asset purchases," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue apr25.
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