The Federal Reserve's Current Framework for Monetary Policy: A Review and Assessment

69 Pages Posted: 26 Jun 2019

See all articles by Janice Eberly

Janice Eberly

Northwestern University

James H. Stock

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Date Written: June 2019

Abstract

We review and assess the monetary policy framework currently used by the Federal Reserve, with special focus on policies that operate through the slope of the term structure, including forward guidance and large scale asset purchases. These slope policies are important at the zero lower bound. We study the performance of counterfactual monetary policies since the Great Recession in the framework of a structural VAR, identified using high-frequency jumps in asset prices around FOMC meetings as external instruments. The intention is to give guidance to policymakers responding to future downturns. In our counterfactuals, we find that slope policies played an important role in supporting the recovery, but did not fully circumvent the zero lower bound. In our simulations, earlier and more aggressive use of slope policies support a faster recovery. The recovery would also have been faster, with the unemployment gap closing seven quarters earlier, if the Fed had inherited a higher level of inflation and nominal interest rates consistent with a higher inflation target coming into the financial crisis recession.

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Suggested Citation

Eberly, Janice and Stock, James H. and Wright, Jonathan H., The Federal Reserve's Current Framework for Monetary Policy: A Review and Assessment (June 2019). NBER Working Paper No. w26002, Available at SSRN: https://ssrn.com/abstract=3408937

Janice Eberly (Contact Author)

Northwestern University ( email )

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James H. Stock

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

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