Modeling U.S. Monetary Policy during the Global Financial Crisis and Lessons for COVID-19
27 Pages Posted: 11 Sep 2020
Date Written: August 24, 2020
The paper formulates the modeling of unconventional monetary policy and critically evaluates its effectiveness to address the Global Financial Crisis. We begin with certain principles guiding general scientific modeling and focus on Milton Friedman’s 1968 Presidential Address that delineates the strengths and limitations of monetary policy to pursue certain goals. The modeling of monetary policy with its novelty of quantitative easing to target unusually high unemployment is evaluated by a Markov switching econometric model using monthly data for the period 2002-2015. We conclude by relating the lessons learned from unconventional monetary policy during the Global Financial Crisis to the recent bold initiatives of the Fed to mitigate the economic and financial impact of the COVID-19 pandemic on U.S. households and businesses.
Keywords: Monetary Policy, Quantitative Easing, 10-Year Treasury Rate, Unemployment, Labor Market, The COVID-19 Pandemic and the Fed
JEL Classification: C10, C45, C58, E52, E58
Suggested Citation: Suggested Citation