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U.S. monetary policy: a view from macro theory

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  • William T. Gavin
  • Benjamin D. Keen

Abstract

We use a dynamic stochastic general equilibrium model to address two questions about U.S. monetary policy: 1) Can monetary policy elevate output when it is below potential? and 2) Is the zero lower bound a trap? The model answer to the first question is yes it can, but the effect is only temporary and probably not welfare enhancing. The answer to the second question is more complicated becasue it depends on policy. It also depends on whether it is the inflation rate or the real interest rate that will adjust over the longer run if the policy rate is held near zero for an extended period. We use the Fisher equation to analyze possible outcomes for situtations where the central bank has promised to keep the interest rate near zero for an extended period.

Suggested Citation

  • William T. Gavin & Benjamin D. Keen, 2012. "U.S. monetary policy: a view from macro theory," Working Papers 2012-019, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2012-019
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    More about this item

    Keywords

    Monetary policy; Econometric models;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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