Monetary Policy in the Next Recession?

48 Pages Posted: 3 Nov 2020

See all articles by Stephen G. Cecchetti

Stephen G. Cecchetti

National Bureau of Economic Research (NBER); Brandeis International Business School; Centre for Economic Policy Research (CEPR)

Michael Feroli

J.P. Morgan Chase & Co.

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Catherine L. Mann

Brandeis University

Kermit L. Schoenholtz

New York University - Stern School of Business - Department of Economics

Date Written: October 2020

Abstract

In many advanced countries, lowering the policy rate to zero probably will be insufficient to counter the next conventional recession. We explore a range of new monetary policy (NMP) tools including forward guidance, balance sheet tools and negative interest rates. Reflecting the complex transmission of monetary policy, we examine each NMP's impact on financial conditions indexes (FCIs) in eight advanced economies. We find: (1) the global component of financial conditions is quite important; (2) state-contingent forward guidance is the tool most associated with improved conditions; (3) policymakers typically implemented NMPs during stress periods, and this endogenous usage pattern makes any econometric assessment difficult; (4) NMPs generally were not sufficient to overcome the headwinds already present. This leads us to conclude that, while central bankers should work to incorporate NMP tools into their reaction function, they should be humble about their likely effectiveness.

Keywords: financial conditions, Financial conditions index, forward guidance, maturity extension, monetary policy, Negative Interest Rates, Quantitative easing, Stabilization Policy, Unconventional Monetary Policy

JEL Classification: E32, E52, E58

Suggested Citation

Cecchetti, Stephen G. and Cecchetti, Stephen G. and Feroli, Michael and Kashyap, Anil K. and Mann, Catherine L. and Schoenholtz, Kermit L., Monetary Policy in the Next Recession? (October 2020). CEPR Discussion Paper No. DP15365, Available at SSRN: https://ssrn.com/abstract=3723554

Stephen G. Cecchetti (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Brandeis International Business School ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Michael Feroli

J.P. Morgan Chase & Co. ( email )

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Anil K. Kashyap

University of Chicago, Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Federal Reserve Bank of Chicago ( email )

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Catherine L. Mann

Brandeis University ( email )

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United States
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Kermit L. Schoenholtz

New York University - Stern School of Business - Department of Economics ( email )

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New York, NY 10012
United States
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HOME PAGE: http://w4.stern.nyu.edu/faculty/bio/kim-schoenholtz

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