Working Paper: NBER ID: w26002
Authors: Janice C. Eberly; James H. Stock; Jonathan H. Wright
Abstract: We review and assess the monetary policy framework currently used by the Federal Reserve, with special focus on policies that operate through the slope of the term structure, including forward guidance and large scale asset purchases. These slope policies are important at the zero lower bound. We study the performance of counterfactual monetary policies since the Great Recession in the framework of a structural VAR, identified using high-frequency jumps in asset prices around FOMC meetings as external instruments. The intention is to give guidance to policymakers responding to future downturns. In our counterfactuals, we find that slope policies played an important role in supporting the recovery, but did not fully circumvent the zero lower bound. In our simulations, earlier and more aggressive use of slope policies support a faster recovery. The recovery would also have been faster, with the unemployment gap closing seven quarters earlier, if the Fed had inherited a higher level of inflation and nominal interest rates consistent with a higher inflation target coming into the financial crisis recession.
Keywords: monetary policy; slope policies; zero lower bound; economic recovery
JEL Codes: C22; E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| slope policies (R28) | economic recovery (E65) |
| slope policies (R28) | unemployment rate (J64) |
| slope policies (R28) | inflation (E31) |
| higher levels of inflation (E31) | unemployment gap closure (J68) |
| higher nominal interest rates (E43) | unemployment gap closure (J68) |
| slope policies (R28) | faster recovery in labor market (J68) |
| stronger slope policies (R28) | faster recovery (Y60) |