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

  • Ellis W. Tallman
  • Saeed Zaman

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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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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  1. Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES 2008_033, ULB -- Universite Libre de Bruxelles.
  2. Kenneth Beauchemin & Saeed Zaman, 2011. "A medium scale forecasting model for monetary policy," Working Paper 1128, Federal Reserve Bank of Cleveland.
  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. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 47-82, 02.
  5. 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.
  6. Michael Bauer & Glenn Rudebusch, 2011. "Signals from unconventional monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov.21.
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