Incorporating Scenario Analysis into the Federal Reserve’s Policy Strategy and Communications
Michael Bordo (),
Andrew Levin () and
Mickey D. Levy
No 27369, NBER Working Papers from National Bureau of Economic Research, Inc
The U.S. economy currently faces a truly extraordinary degree of uncertainty as a consequence of the COVID-19 pandemic. In these circumstances, the Federal Reserve could begin highlighting alternative scenarios to illustrate key risks to the economic outlook, and such scenarios could inform the Fed’s policy strategy and public communications. In this paper, we present a set of illustrative scenarios, including a baseline scenario with a rapid but incomplete recovery this year (an upward-tilting checkmark), a benign scenario in which an effective cure or vaccine becomes available and facilitates a nearly complete recovery by mid-2021, and a severely adverse scenario involving persistently high unemployment and disinflationary pressures. Insights into these scenarios can be drawn from key historical episodes, including the Spanish flu, the Great Depression, the end of World War II, and the global financial crisis. We conclude by identifying key challenges that the Federal Reserve might face in adjusting its monetary policy and emergency credit facilities under each of these alternative scenarios.
JEL-codes: E52 E58 N10 N11 N12 (search for similar items in EconPapers)
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