scholarly journals Transition from the Taylor rule to the zero lower bound

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Stan Hurn ◽  
Nicholas Johnson ◽  
Annastiina Silvennoinen ◽  
Timo Teräsvirta
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Federal Reserve ◽  
Structural Changes ◽  
Taylor Rule ◽  
Policy Formation ◽  
Zero Lower Bound ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Smooth Transitions

Abstract This paper examines the Taylor rule in the context of United States monetary policy since 1965, particularly with respect to the zero-lower-bound era of the federal funds rate from 2009 to 2016. A nonlinear Taylor rule is developed which features smooth transitions in the first two moments of the federal funds rate. This flexible specification is found to usefully capture observed nonlinearity, while accounting for the well-documented structural changes in monetary policy formation at the Federal Reserve in the last 50 years, and especially in the recent zero-lower-bound era.

scholarly journals Where Would the Federal Funds Rate Be, If It Could Be Negative?

2012 ◽  
pp. 1-6 ◽  
Author(s):  
Ellis W. Talman ◽  
Saeed Zaman
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Great Recession ◽  
Federal Reserve ◽  
Forecasting Model ◽  
Zero Lower Bound ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Macroeconomic Forecasting ◽  
Unconstrained Path

In the wake of Great Recession, the Federal Reserve engaged in conventional monetary policy actions by reducing the federal funds rate. But soon the rate hit zero, and could go no lower. In such environments, policymakers still think in terms of where the federal funds rate should be, were it possible to go negative. To project the "unconstrained path" of the funds rate—ignoring the zero lower bound—and to identify the key underlying shocks driving that path, we employ a statistical macroeconomic forecasting model. We find that the federal funds rate would have been extremely negative during 2009-2010.

scholarly journals Monetary Policy and Real Borrowing Costs at the Zero Lower Bound

2015 ◽  
Vol 7 (1) ◽  
pp. 77-109 ◽  
Author(s):  
Simon Gilchrist ◽  
David López-Salido ◽  
Egon Zakrajšek
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Zero Lower Bound ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Borrowing Costs ◽  
Pass Through

This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the two-year Treasury yield around policy announcements and changes in the ten-year Treasury yield that are orthogonal to those in the two-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields. (JEL E31, E43, E44, E52)

scholarly journals Forecast accuracy of a BVAR under alternative specifications of the zero lower bound

2017 ◽  
Vol 21 (2) ◽  
Author(s):  
Tim Oliver Berg
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Lower Bound ◽  
Forecast Accuracy ◽  
Zero Lower Bound ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Policy Shocks ◽  
Density Forecasts ◽  
Effect Of Monetary Policy

AbstractThis paper discusses how the forecast accuracy of a Bayesian vector autoregression (BVAR) is affected by introducing the zero lower bound on the federal funds rate. As a benchmark I adopt a common BVAR specification, including 18 variables, estimated shrinkage, and no nonlinearity. Then I entertain alternative specifications of the zero lower bound. I account for the possibility that the effect of monetary policy on the economy is different in this regime, replace the federal funds rate by its shadow rate, consider a logarithmic transformation, feed in monetary policy shocks, or utilize conditional forecasts allowing for all shocks implemented through a rejection sampler. The latter two are also coupled with interest rate expectations from future contracts. It is shown that the predictive densities of all these specifications are greatly different, suggesting that this modeling choice is not innocuous. The comparison is based on the accuracy of point and density forecasts of major US macroeconomic series during the period 2009:1 to 2014:4. The introduction of the zero lower bound is not beneficial per se, but it depends on how it is done and which series is forecasted. With caution, I recommend the shadow rate specification and the rejection sampler combined with interest rate expectations to deal with the nonlinearity in the policy rate. Since the policy rate will remain low for some time, these findings could prove useful for practical forecasters.

scholarly journals Identification at the Zero Lower Bound

Econometrica ◽  
2021 ◽  
Vol 89 (6) ◽  
pp. 2855-2885 ◽  
Author(s):  
Sophocles Mavroeidis
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Causal Effects ◽  
Zero Lower Bound ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
Vector Autoregressive ◽  
Structural Vector Autoregressive Model ◽  
Structural Vector

I show that the zero lower bound (ZLB) on interest rates can be used to identify the causal effects of monetary policy. Identification depends on the extent to which the ZLB limits the efficacy of monetary policy. I propose a simple way to test the efficacy of unconventional policies, modeled via a “shadow rate.” I apply this method to U.S. monetary policy using a three‐equation structural vector autoregressive model of inflation, unemployment, and the Federal Funds rate. I reject the null hypothesis that unconventional monetary policy has no effect at the ZLB, but find some evidence that it is not as effective as conventional monetary policy.

scholarly journals Deleveraging and Monetary Policy: Japan Since the 1990s and the United States Since 2007

2012 ◽  
Vol 26 (3) ◽  
pp. 177-202 ◽  
Author(s):  
Kazuo Ueda
Keyword(s):  
United States ◽  
Monetary Policy ◽  
Great Recession ◽  
Federal Reserve ◽  
The United States ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
The Great Recession ◽  
Policy Responses ◽  
The U.S

As the U.S. economy works through a sluggish recovery several years after the Great Recession technically came to an end in June 2009, it can only look with horror toward Japan's experience of two decades of stagnant growth since the early 1990s. In contrast to Japan, U.S. policy authorities responded to the financial crisis since 2007 more quickly. Surely, they learned from Japan's experience. I will begin by describing how Japan's economic situation unfolded in the early 1990s and offering some comparisons with how the Great Recession unfolded in the U.S. economy. I then turn to the Bank of Japan's policy responses to the crisis and again offer some comparisons to the Federal Reserve. I will discuss the use of both the conventional interest rate tool—the federal funds rate in the United States, and the “call rate” in Japan—and nonconventional measures of monetary policy and consider their effectiveness in the context of the rest of the financial system.

Domestic and Cross-border Impact of US Monetary Policy at the Zero Lower Bound

2019 ◽  
pp. 161-181
Author(s):  
Qianying Chen ◽  
Andrew Filardo ◽  
Dong He ◽  
Feng Zhu
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Emerging Economies ◽  
Balance Sheet ◽  
Output Growth ◽  
Zero Lower Bound ◽  
Federal Funds Rate ◽  
Cross Border ◽  
Us Economy ◽  
Us Monetary Policy

This is a chapter of the domestic impact as well as cross-border spillovers of US monetary policy at the zero lower bound (ZLB) to advanced and emerging economies. We estimate the empirical relevance of the various channels of international policy transmission with a global vector error correction macroeconometric model. To address the challenge of measuring the stance of monetary policy at the ZLB, we proxy it with a shadow federal funds rate, which captures the impact of central bank balance sheet policies. We find evidence that US monetary policy was effective in stimulating the US economy. For many of the other economies, the spillovers from the quantitative easing had sizeable and persistent impacts on output growth, inflation, and equity returns. The responses in the emerging economies were rather diverse. In terms of exchange rates, a number of emerging economy currencies faced strong appreciation pressures (e.g. Malaysian ringgit and Korean won).

scholarly journals THE ROLE OF MONEY IN FEDERAL RESERVE POLICY

2020 ◽  
pp. 1-21 ◽  
Author(s):  
Irfan A. Qureshi
Keyword(s):  
Monetary Policy ◽  
Federal Reserve ◽  
Time Data ◽  
Federal Funds ◽  
Federal Funds Rate ◽  
The Great Recession ◽  
Interest Rate Rule ◽  
Suitable Framework ◽  
Federal Reserve Policy

This paper shows that money is a relevant macroeconomic indicator for the description of US monetary policy with simple rules. Empirical analysis based on novel real-time data reveals the economically and statistically significant effect of money on the federal funds rate during the Volcker–Greenspan era, highlighting an interest rate rule that better explains historical policy. The findings suggest that the bias against including money in mainstream macroeconomic models may be due to relying on an incorrect measure of money. A gradual deviation from this rule explains loose monetary policy prior to the Great Recession. Including money aggregates in rule-based policy presents a suitable framework to evaluate and guide Federal Reserve policy.

scholarly journals Do Forecasters Agree on a Taylor Rule?

2015 ◽  
pp. 1-6 ◽  
Author(s):  
Charles T. Carlstrom ◽  
Margaret Jacobson
Keyword(s):  
Interest Rates ◽  
Federal Reserve ◽  
Taylor Rule ◽  
Output Growth ◽  
Federal Funds ◽  
Federal Funds Rate

Forecasters’ projections of interest rates vary a great deal. We use a Taylor rule to investigate two possible reasons why. Namely, do differences arise because forecasters have different projections for output growth or inflation, or do they arise because forecasters follow different guidelines to predict what the Federal Reserve will do with the federal funds rate? We find evidence for both explanations. Forecasters appear to use very different projections for inflation and output growth, but they also seem to use dramatically different Taylor rule coefficients.

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