Monetary Policy Options at the Effective Lower Bound: Assessing the Federal Reserveâ€™s Current Policy Toolkit
Etienne Gagnon (),
Diego VilÃ¡n and
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Hess Chung: Board of Governors of the Federal Reserve System
Taisuke Nakata: University of Tokyo
Matthias Paustian: Board of Governors of the Federal Reserve System
Bernd Schlusche: Board of Governors of the Federal Reserve System
James Trevino: Board of Governors of the Federal Reserve System
Diego VilÃ¡n: Board of Governors of the Federal Reserve System
Wei Zheng: Visa Inc.
No CARF-F-483, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo
We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in response to the Global Financial Crisis are modestly effective in speeding up the labor market recovery and return of inflation to 2 percent following an economic slump. However, these policies have only small effects in limiting the initial rise in the unemployment rate during a recession because of transmission lags. As with any model-based analysis, we also discuss a number of caveats regarding our results.
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