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Monetary Policy in the Next Recession?

Author

Listed:
  • Cecchetti, Stephen
  • Feroli, Michael
  • Kashyap, Anil
  • Mann, Catherine L.
  • Schoenholtz, Kermit L.

Abstract

In many advanced countries, lowering the policy rate to zero probably will be insufficient to counter the next conventional recession. We explore a range of new monetary policy (NMP) tools including forward guidance, balance sheet tools and negative interest rates. Reflecting the complex transmission of monetary policy, we examine each NMP’s impact on financial conditions indexes (FCIs) in eight advanced economies. We find: (1) the global component of financial conditions is quite important; (2) state-contingent forward guidance is the tool most associated with improved conditions; (3) policymakers typically implemented NMPs during stress periods, and this endogenous usage pattern makes any econometric assessment difficult; (4) NMPs generally were not sufficient to overcome the headwinds already present. This leads us to conclude that, while central bankers should work to incorporate NMP tools into their reaction function, they should be humble about their likely effectiveness.

Suggested Citation

  • Cecchetti, Stephen & Feroli, Michael & Kashyap, Anil & Mann, Catherine L. & Schoenholtz, Kermit L., 2020. "Monetary Policy in the Next Recession?," CEPR Discussion Papers 15365, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15365
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    References listed on IDEAS

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    4. Barbara Rossi, 2018. "Identifying and estimating the effects of unconventional monetary policy in the data: How to do It and what have we learned?," Economics Working Papers 1641, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2020.
    5. Feroli, Michael & Greenlaw, David & Hooper, Peter & Mishkin, Frederic S. & Sufi, Amir, 2017. "Language after liftoff: Fed communication away from the zero lower bound," Research in Economics, Elsevier, vol. 71(3), pages 452-490.
    6. Kenneth N. Kuttner, 2018. "Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond," Journal of Economic Perspectives, American Economic Association, vol. 32(4), pages 121-146, Fall.
    7. Takatoshi Ito, 2006. "Japanese monetary policy: 1998-2005 and beyond," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in Asia: approaches and implementation, volume 31, pages 105-132, Bank for International Settlements.
    8. Jens Eisenschmidt & Frank Smets, 2019. "Negative Interest Rates: Lessons from the Euro Area," Central Banking, Analysis, and Economic Policies Book Series, in: Álvaro Aguirre & Markus Brunnermeier & Diego Saravia (ed.),Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications, edition 1, volume 26, chapter 2, pages 013-042, Central Bank of Chile.
    9. Rossi, Barbara, 2019. "Identifying and Estimating the Effects of Unconventional Monetary Policy: How to Do It And What Have We Learned?," CEPR Discussion Papers 14064, C.E.P.R. Discussion Papers.
    10. Okina, Kunio & Shiratsuka, Shigenori, 2004. "Policy commitment and expectation formation: Japan's experience under zero interest rates," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 75-100, March.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The QE Ratchet
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2021-07-26 11:56:27

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    Cited by:

    1. Thomas Palley, 2021. "Financialization revisited: the economics and political economy of the vampire squid economy," Review of Keynesian Economics, Edward Elgar Publishing, vol. 9(4), pages 461–492-4, October.

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    More about this item

    Keywords

    Monetary policy; Stabilization policy; Financial conditions; Financial conditions index; Unconventional monetary policy; Quantitative easing; Maturity extension; Forward guidance; Negative interest rates;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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