How Optimal Was U.S. Monetary Policy at the Zero Lower Bound?

Brent Bundick, Logan Hotz () and Andrew Smith

No RWP 23-14, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: The zero lower bound on nominal interest rates can generate substantial downward pressure on longer-term inflation expectations. We use data on interest rate options and inflation compensation to estimate how the probability that the zero lower bound will bind in the future has weighed on inflation expectations in the United States. Over the 2008–19 period, we estimate that the zero lower bound imparted only a small drag on longer-term inflation expectations of around 10 basis points. We argue that the Federal Reserve's forward guidance and large-scale asset purchases largely offset the potential disinflationary effects of the zero lower bound, even prior to the formal adoption of an average inflation-targeting framework.

Keywords: monetary policy; inflation expectations; zero lower bound; forward guidance; asset purchases (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 30
Date: 2023-12-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:97575

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DOI: 10.18651/RWP2023-14

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