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How Optimal Was U.S. Monetary Policy at the Zero Lower Bound?

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Abstract

The zero lower bound on nominal interest rates can generate substantial downward pressure on longer-term inflation expectations. We use data on interest rate options and inflation compensation to estimate how the probability that the zero lower bound will bind in the future has weighed on inflation expectations in the United States. Over the 2008–19 period, we estimate that the zero lower bound imparted only a small drag on longer-term inflation expectations of around 10 basis points. We argue that the Federal Reserve's forward guidance and large-scale asset purchases largely offset the potential disinflationary effects of the zero lower bound, even prior to the formal adoption of an average inflation-targeting framework.

Suggested Citation

  • Brent Bundick & Logan Hotz & Andrew Lee Smith, 2023. "How Optimal Was U.S. Monetary Policy at the Zero Lower Bound?," Research Working Paper RWP 23-14, Federal Reserve Bank of Kansas City, revised 15 Nov 2024.
    • Handle: RePEc:fip:fedkrw:97575
    DOI: 10.18651/RWP2023-14
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    References listed on IDEAS

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    1. Thomas M. Mertens & John C. Williams, 2019. "Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates," AEA Papers and Proceedings, American Economic Association, vol. 109, pages 427-432, May.
    2. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 791-819, April.
    3. David Greenlaw & James D. Hamilton & Ethan Harris & Kenneth D. West, 2018. "A Skeptical View of the Impact of the Fed’s Balance Sheet," NBER Working Papers 24687, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Skaperdas, Arsenios, 2025. "Industry growth at the lower bound," Journal of International Money and Finance, Elsevier, vol. 152(C).
    2. Yangyang Ji, 2026. "Are positive technology shocks expansionary at the zero lower bound?," Empirical Economics, Springer, vol. 70(2), pages 1-42, February.

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    Keywords

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    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

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