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Targeting Constant Money Growth at the Zero Lower Bound

Michael Belongia () and Peter Ireland ()

No 913, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Unconventional policy actions, including quantitative easing and forward guidance, taken by the Federal Reserve during and since the financial crisis and Great Recession of 2007-2009, have been widely interpreted as attempts to influence long-term interest rates after the federal funds rate hit its zero lower bound. Alternatively, similar actions could have been directed at stabilizing the growth rate of a monetary aggregate, so as to maintain a more consistent level of policy accommodation in the face of severe disruptions to the financial sector and the economy at large. This paper bridges the gap between these two views, by developing a structural vector autoregression that uses information contained in both interest rates and a Divisia monetary aggregate to infer the stance of Federal Reserve policy and to gauge its effects on aggregate output and prices. Counterfactual simulations from the SVAR suggest that targeting money growth at the zero lower bound would not only have been feasible, but would also have supported a stronger and more rapid economic recovery since 2010.

Keywords: Constant money growth rate rules; Divisia monetary aggregates; Quantitative easing; Structural vector autoregressions; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E31 E32 E37 E41 E43 E47 E51 E52 E65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-mac and nep-mon
Date: 2016-05-25
References: View references in EconPapers View complete reference list from CitEc
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