Working Paper: CEPR ID: DP15365
Authors: Stephen G. Cecchetti; Michael Feroli; Anil K. Kashyap; Catherine L. Mann; Kermit L. Schoenholtz
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: monetary policy; stabilization policy; financial conditions; financial conditions index; unconventional monetary policy; quantitative easing; maturity extension; forward guidance; negative interest rates
JEL Codes: E32; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global component of financial conditions (F30) | domestic financial conditions (F30) |
| financial conditions (E66) | economic activity and inflation (E31) |
| stress (J81) | effectiveness of NMP tools (C52) |
| NMP tools (C59) | tightening of financial conditions (F65) |
| other factors (C39) | tightening of financial conditions (F65) |
| NMP tools (C59) | financial conditions (E66) |
| NMP tools (C59) | economic activity and inflation (E31) |