Incorporating Scenario Analysis into the Federal Reserve's Policy Strategy and Communications

35 Pages Posted: 15 Jun 2020 Last revised: 14 Oct 2022

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Andrew T. Levin

Dartmouth College - Department of Economics

Mickey D. Levy

Berenberg Capital Markets

Date Written: June 2020

Abstract

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.

Suggested Citation

Bordo, Michael D. and Levin, Andrew T. and Levy, Mickey D., Incorporating Scenario Analysis into the Federal Reserve's Policy Strategy and Communications (June 2020). NBER Working Paper No. w27369, Available at SSRN: https://ssrn.com/abstract=3626870

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrew T. Levin

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States

Mickey D. Levy

Berenberg Capital Markets ( email )

New York, NY
United States

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