How has empirical monetary policy analysis in the U.S. changed after the financial crisis?
Neville R. Francis,
Laura Jackson Young () and
Michael T. Owyang
Economic Modelling, 2020, vol. 84, issue C, 309-321
During the Great Recession, the Federal Reserve lowered the federal funds rate nearly to zero and began using unconventional monetary policy. A fed funds rate near zero is no longer a proper representation of policy. Thus, empirical models of monetary policy cannot be estimated as usual. We use a linear empirical model to investigate whether alternative instruments such as the balance sheet or shadow rates can replace the fed funds rate to capture unconventional policy. Our objective is to determine whether adding to or replacing the policy instrument can preserve linearity or whether one must allow structural breaks. We include data for both normal and unconventional periods and find that shadow rates preserve linearity better than using a bounded federal funds rate alone, adding the balance sheet, or adding long rates. When short rates are bounded, shadow rates produce similar responses to the unbounded period and alleviate the need for structural breaks. [JEL codes: E43, E44, E52] Keywords: zero lower bound, affine term structure.
Keywords: Zero lower bound; Affine term structure (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:84:y:2020:i:c:p:309-321
Access Statistics for this article
Economic Modelling is currently edited by S. Hall and P. Pauly
More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Haili He ().