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Gauging the Ability of the FOMC to Respond to Future Recessions

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  • David L. Reifschneider

Abstract

Current forecasts suggest that the federal funds rate in the future is likely to level out at a rather low level by historical standards. If so, then the FOMC will have less ability than in the past to cut short-term interest rates in response to a future recession, suggesting a risk that economic downturns could turn out to be more severe as a result. However, simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited to cut short-term interest rates in most, but probably not all, circumstances.

Suggested Citation

  • David L. Reifschneider, 2016. "Gauging the Ability of the FOMC to Respond to Future Recessions," Finance and Economics Discussion Series 2016-068, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2016-68
    DOI: 10.17016/FEDS.2016.068
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    File URL: http://www.federalreserve.gov/econresdata/feds/2016/files/2016068pap.pdf
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    References listed on IDEAS

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    1. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, July.
    2. Jane Dokko & Brian M. Doyle & Michael T. Kiley & Jinill Kim & Shane Sherlund & Jae Sim & Skander Van Den Heuvel, 2011. "Monetary policy and the global housing bubble," Economic Policy, CEPR;CES;MSH, vol. 26(66), pages 233-283, April.
    3. Olivier J. Blanchard, 2016. "The US Phillips Curve: Back to the 60s?," Policy Briefs PB16-1, Peterson Institute for International Economics.
    4. Olivier Blanchard, 2016. "The Phillips Curve: Back to the '60s?," American Economic Review, American Economic Association, vol. 106(5), pages 31-34, May.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Summer’s End — and a reading list to catch up on what you may have missed
      by thebusinesscycleblog in The business cycle blog on 2016-09-03 18:41:38

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    Cited by:

    1. Philippe Andrade & Jordi Galí & Hervé Le Bihan & Julien Matheron, 2017. "The optimal inflation target and the natural rate of interest," Economics Working Papers 1591, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Michael T. Kiley & John M. Roberts, 2017. "Monetary Policy in a Low Interest Rate World," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 317-396.
    3. repec:aea:jecper:v:31:y:2017:i:3:p:47-66 is not listed on IDEAS

    More about this item

    Keywords

    Monetary policy ; Asset purchases ; Forward guidance ; Zero lower bound;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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