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Monetary policy expectations and economic fluctuations at the zero lower bound

Author

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  • Rachel Doehr
  • Enrique Martinez-Garcia

Abstract

Using a panel of survey?based measures of future interest rates from the Survey of Professional Forecasters, we study the dynamic relationship between shocks to monetary policy expectations and fluctuations in economic activity and inflation. We propose a smallscale structured recursive vector autoregression (VAR) model to identify the macroeconomic effects of changes in expectations about monetary policy. Our results show that when interest rates are away from the zero?lower bound, a perception of higher future interest rates leads to a significant rise in current measures of inflation and a rise in economic activity. However, when interest rates approach zero, the effect on economic activity is the opposite, with significant but lagged decreases in economic activity following an upward revision to expected future interest rates. The impact of changes in expectations about monetary policy is robust when we control for other features of the transmission mechanism (e.g., long?term interest rates, quantitative easing, exchange rate movements and even oil price shocks). Our findings also show that monetary policy expectations contribute up to 34 percent to the variability of economic activity (and 24 percent on inflation) while policy rates are fixed at the zero?lower bound. This evidence points to the importance of managing monetary policy expectations (forward guidance) as a crucial policy tool for stimulating economic activity at the zero?lower bound.

Suggested Citation

  • Rachel Doehr & Enrique Martinez-Garcia, 2015. "Monetary policy expectations and economic fluctuations at the zero lower bound," Globalization Institute Working Papers 240, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:240
    DOI: 10.24149/gwp240
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    Cited by:

    1. Stefania D'Amico & Thomas B. King, 2015. "What Does Anticipated Monetary Policy Do?," Working Paper Series WP-2015-10, Federal Reserve Bank of Chicago.

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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