Did the Fed Remain at the ZLB Long Enough? Lessons from the 2008-2019 Period

We present evidence suggesting the Fed can learn useful lessons by looking at the effectiveness of its policy over the 2008-2019 time period. Using a medium-scale New Keynesian model estimated with Bayesian techniques, we find that by raising the nominal interest rate above the ZLB from 2015:4 to 2019:4 and gradually limiting recourse to quantitative easing, the Fed undid most of the stimulus it gave the economy during the 2008-2014 time segment. We estimate that during the two years prior to lift-off, the per quarter average deviation of inflation from target was negative so that potential fears of rising inflation were unwarranted. Investment growth was most adversely affected by the Fed’s policy during the 2015-2019 time segment. Total hours worked had not yet returned to their pre-recession level of 2008 by the end of 2019. We conclude that faced with exceptional events such as the Great Recession and the pandemic, the monetary and fiscal authorities in the future could combine their efforts to provide stimulus over a longer period of time than they did after the Great Recession.