Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment

113 Pages Posted: 20 Dec 2004

See all articles by Ben S. Bernanke

Ben S. Bernanke

Board of Governors of the Federal Reserve System

Vincent R. Reinhart

American Enterprise Institute (AEI)

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section

Date Written: September 2004

Abstract

The success over the years in reducing inflation and, consequently, the average level of nominal interest rates has increased the likelihood that the nominal policy interest rate may become constrained by the zero lower bound. When that happens, a central bank can no longer stimulate aggregate demand by further interest-rate reductions and must rely on non-standard policy alternatives. To assess the potential effectiveness of such policies, we analyze the behavior of selected asset prices over short periods surrounding central bank statements or other types of financial or economic news and estimate no-arbitrage models of the term structure for the United States and Japan. There is some evidence that central bank communications can help to shape public expectations of future policy actions and that asset purchases in large volume by a central bank would be able to affect the price or yield of the targeted asset.

Keywords: Deflation, zero bound, monetary policy, term structure, policy expectations

JEL Classification: E41, E42, E58, E61

Suggested Citation

Bernanke, Ben S. and Reinhart, Vincent R. and Sack, Brian P., Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment (September 2004). FEDS Working Paper No. 2004-48. Available at SSRN: https://ssrn.com/abstract=632381 or http://dx.doi.org/10.2139/ssrn.632381

Ben S. Bernanke

Board of Governors of the Federal Reserve System

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

Vincent R. Reinhart (Contact Author)

American Enterprise Institute (AEI) ( email )

1150 17th Street, N.W.
Washington, DC 20036
United States

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-736-5671 (Phone)
202-452-2301 (Fax)

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