Monetary Policy Options at the Effective Lower Bound: Assessing the Federal Reserve's Current Policy Toolkit

63 Pages Posted: 7 Feb 2019 Last revised: 21 Feb 2019

See all articles by Hess T. Chung

Hess T. Chung

Board of Governors of the Federal Reserve System

Etienne Gagnon

Board of Governors of the Federal Reserve System

Taisuke Nakata

Board of Governors of the Federal Reserve System

Matthias O. 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 Vilan

Board of Governors of the Federal Reserve System

Wei Zheng

Board of Governors of the Federal Reserve System

Date Written: 2019-02-01

Abstract

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 c aveats regarding our results.

Keywords: Effective lower bound, Federal Reserve balance sheets, Forward guidance, Large-scale asset purchases, Monetary policy

JEL Classification: E58, E52, E31, E32

Suggested Citation

Chung, Hess T. and Gagnon, Etienne and Nakata, Taisuke and Paustian, Matthias O. and Schlusche, Bernd and Trevino, James and Vilan, Diego and Zheng, Wei, Monetary Policy Options at the Effective Lower Bound: Assessing the Federal Reserve's Current Policy Toolkit (2019-02-01). FEDS Working Paper No. 2019-003. Available at SSRN: https://ssrn.com/abstract=3330408 or http://dx.doi.org/10.17016/FEDS.2019.003

Hess T. Chung (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(20) 973-7484 (Phone)

Etienne Gagnon

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
2024523522 (Phone)

Taisuke Nakata

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Matthias O. Paustian

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Bernd Schlusche

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

James Trevino

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Diego Vilan

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Wei Zheng

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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