The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment

James D. Hamilton and Jing Cynthia Wu

No 16956, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper reviews alternative options for monetary policy when the short-term interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates. We use a model of risk-averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level, slope and curvature term-structure risk. We find these Treasury factors historically were quite helpful for predicting both yields and excess returns over 1990-2007. The historical correlations are consistent with the claim that if in December of 2006, the Fed were to have sold off all its Treasury holdings of less than one-year maturity (about $400 billion) and use the proceeds to retire Treasury debt from the long end, this might have resulted in a 14-basis-point drop in the 10-year rate and an 11-basis-point increase in the 6-month rate. We also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009. Our estimates imply that at the zero lower bound, such a maturity swap would have the same effects as buying $400 billion in long-term maturities outright with newly created reserves, and could reduce the 10-year rate by 13 basis points without raising short-term yields.

JEL-codes: E43 E52 G12 H63 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Note: AP ME PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (74)

Published as James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 3-46, 02.

Downloads: (external link)
http://www.nber.org/papers/w16956.pdf (application/pdf)

Related works:
Journal Article: The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment (2012)
Journal Article: The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:16956

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w16956

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().