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Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit

Author

Listed:
  • Hess Chung
  • Etienne Gagnon
  • Taisuke Nakata
  • Matthias Paustian
  • Bernd Schlusche
  • James Trevino
  • Diego Vilan
  • Wei Zheng

Abstract

We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in response to the Global Financial Crisis are modestly effective in speeding up the labor market recovery and return of inflation to 2 percent following an economic slump. However, these policies have only small effects in limiting the initial rise in the unemployment rate during a recession because of transmission lags. As with any model-based analysis, we also discuss a number of c aveats regarding our results.

Suggested Citation

  • Hess Chung & Etienne Gagnon & Taisuke Nakata & Matthias Paustian & Bernd Schlusche & James Trevino & Diego Vilan & Wei Zheng, 2019. "Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit," Finance and Economics Discussion Series 2019-003, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2019-03
    DOI: 10.17016/FEDS.2019.003
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    File URL: https://www.federalreserve.gov/econres/feds/files/2019003pap.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Effective lower bound ; Federal Reserve balance sheets ; Forward guidance ; Large-scale asset purchases ; Monetary policy;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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