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Measuring the Effect of the Zero Lower Bound on Monetary Policy

Author

Listed:
  • Carlos Viana de Carvalho

    (Department of Economics PUC-Rio)

  • EriC Hsu

    (UC Berkeley)

  • Fernanda Necchio

    (FRB San Francisco)

Abstract

The Zero Lower Bound (ZLB) on interest rates is often regarded as an important constraint on monetary policy. To assess how the ZLB affected the Fed's ability to conduct policy, we estimate the effects of Fed communication on yields of different maturities in the pre-ZLB and ZLB periods. Before the ZLB period, communication affects both short- and long-dated yields. In contrast, during the ZLB period, the reaction of yields to communication is concentrated in longer-dated yields. Our findings support the view that the ZLB did not put such a critical constraint on monetary policy, as the Fed retained some ability to affect long-term yields through communication.

Suggested Citation

  • Carlos Viana de Carvalho & EriC Hsu & Fernanda Necchio, 2016. "Measuring the Effect of the Zero Lower Bound on Monetary Policy," Textos para discussão 649, Department of Economics PUC-Rio (Brazil).
  • Handle: RePEc:rio:texdis:649
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    References listed on IDEAS

    as
    1. Jens H. E. Christensen & Glenn D. Rudebusch, 2016. "Modeling Yields at the Zero Lower Bound: Are Shadow Rates the Solution?," Advances in Econometrics,in: Dynamic Factor Models, volume 35, pages 75-125 Emerald Publishing Ltd.
    2. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    3. John C. Williams, 2011. "Unconventional monetary policy: lessons from the past three years," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct3.
    4. Hansen, Stephen & McMahon, Michael, 2016. "Shocking language: Understanding the macroeconomic effects of central bank communication," Journal of International Economics, Elsevier, vol. 99(S1), pages 114-133.
    5. Michael D. Bauer & Glenn D. Rudebusch, 2014. "The Signaling Channel for Federal Reserve Bond Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 233-289, September.
    6. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    7. Ellen E. Meade & Miguel Acosta, 2015. "Hanging on Every Word : Semantic Analysis of the FOMC's Postmeeting Statement," FEDS Notes 2015-09-30, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Sharpe, Steven A. & Sinha, Nitish R. & Hollrah, Christopher A., 2017. "What's the Story? A New Perspective on the Value of Economic Forecasts," Finance and Economics Discussion Series 2017-107, Board of Governors of the Federal Reserve System (U.S.), revised 20 Aug 2018.
    2. Carvalho, Carlos & Hsu, Eric & Nechio, Fernanda, 2016. "Fed communication and the zero lower bound," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.

    More about this item

    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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