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U.S. Monetary Policy: A View from Macro Theory

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  • William Gavin

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  • Benjamin Keen

Abstract

We use a dynamic stochastic general equilibrium model to address two questions about U.S. monetary policy: 1) Can monetary policy elevate output when it is below potential? and 2) Is the zero lower bound a trap? The model’s answer to the first question is yes it can, but the effect is only temporary and probably not welfare enhancing. The answer to the second question is more complicated because it depends on policy. It also depends on whether it is the inflation rate or the real interest rate that will adjust over the longer run if the policy rate is held near zero for an extended period. We use the Fisher equation to analyze possible outcomes for situations where the central bank has promised to keep the interest rate near zero for an extended period. Copyright Springer Science+Business Media New York 2013

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 24 (2013)
Issue (Month): 1 (February)
Pages: 33-49

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Handle: RePEc:kap:openec:v:24:y:2013:i:1:p:33-49

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: DSGE; Monetary policy; Output stabilization; Zero lower bound; E31; E42; E58; E61;

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