Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates

According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current short-term rate. Put differently, longer-term yields matter. We show how to measure the zero bound's effects on yields of any maturity. Indeed, 1- and 2-year Treasury yields were surprisingly unconstrained throughout 2008 to 2010, suggesting that monetary and fiscal policy were about as effective as usual during this period. Only beginning in late 2011 did these yields become more constrained. (JEL E43, E52, E62)

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Monetary Policy and the Future of Central Banking

50 Years of Central Banking in Kenya ◽

10.1093/oso/9780198851820.003.0002 ◽

2021 ◽

pp. 9-14

Author(s):

Mitsuhiro Furusawa

Keyword(s):

Monetary Policy ◽

World War Ii ◽

Interest Rates ◽

Global Economy ◽

Commodity Prices ◽

Central Banking ◽

African Countries ◽

Advanced Economies ◽

Policy Frameworks ◽

Forward Looking

The chapter highlights the state of monetary policy in Africa and explores the challenges that central banks face as they address the increasingly complex forces at work in the global economy. It sequences the evolution of monetary policy from the time of World War II under the Bretton Woods system to the more recent forward-looking monetary policy in advanced economies and relates it to influencing the evolution of monetary policy frameworks in Africa. Some challenges affecting African countries are identified, including the collapse of commodity prices, persistent high interest rates spreads, and limitations of high frequency data that constrain monetary authorities’ abilities to take corrective actions in a timely manner. The chapter concludes by providing seven principles towards increasing the effectiveness of monetary policy for countries seeking to move towards forward-looking monetary policy frameworks.

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The Response of Equity Prices to Movements in Long-Term Interest Rates Associated with Monetary Policy Statements: Before and after the Zero Lower Bound

SSRN Electronic Journal ◽

10.2139/ssrn.2246893 ◽

2013 ◽

Cited By ~ 1

Author(s):

Michael T. Kiley

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Interest Rates ◽

Zero Lower Bound ◽

Equity Prices ◽

Before And After ◽

Policy Statements

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Tying Down the Anchor: Monetary Policy Rules and the Lower Bound on Interest Rates

10.24148/wp2019-14 ◽

2019 ◽

pp. 01-41 ◽

Cited By ~ 1

Author(s):

Thomas M. Mertens ◽

◽

John C. Williams ◽

Keyword(s):

Monetary Policy ◽

Lower Bound ◽

Interest Rates ◽

Policy Rules ◽

Monetary Policy Rules

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Monetary Policy Implementation

IMF Working Papers ◽

10.5089/9781513526850.001 ◽

2020 ◽

Vol 20 (26) ◽

Author(s):

Nils Mæhle

Keyword(s):

Monetary Policy ◽

Policy Implementation ◽

Interest Rates ◽

Policy Formulation ◽

Short Term ◽

Policy Transmission ◽

Management Capacity ◽

Policy Frameworks ◽

Operating Target ◽

Operational Issues

This paper discusses operational issues for countries that want to reform their monetary policy frameworks. It argues that stabilizing short-term interest rates on a day-to-day basis has significant advantages, and thus that short-term interest rates, not reserve money, in most cases should be the daily operating target, including for countries relying on a money targeting policy strategy. The paper discusses how a policy formulation framework based on monetary aggregates can be combined with an operational framework that ensures more stable and predictable short-term rates to enhance policy transmission. It also discusses how to best configure an interest-rate-based operational framework when markets are underdeveloped and liqudity management capacity is weak.

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Implementation Errors and Incomplete Information

10.1093/oso/9780198785811.003.0009 ◽

2018 ◽

Cited By ~ 1

Author(s):

Rafael Portillo ◽

Filiz Unsal ◽

Stephen O’Connell ◽

Catherine Pattillo

Keyword(s):

Monetary Policy ◽

Interest Rates ◽

Incomplete Information ◽

Low Income ◽

Complete Information ◽

Structural Features ◽

New Keynesian ◽

Low Income Countries ◽

Keynesian Model ◽

Policy Frameworks

This chapter shows that limited effects of monetary policy can reflect shortcomings of existing policy frameworks in low-income countries rather than (or in addition to) the structural features often put forward in policy and academic debates. The chapter focuses on two pervasive issues: lack of effective frameworks for implementing policy, so that short-term interest rates display considerable unintended volatility, and poor communication about policy intent. The authors introduce these features into an otherwise standard New Keynesian model with incomplete information. Implementation errors result from insufficient accommodation to money demand shocks, creating a noisy wedge between actual and intended interest rates. The representative private agent must then infer policy intentions from movements in interest rates and money. Under these conditions, even exogenous and persistent changes in the stance of monetary policy can have weak effects, even when the underlying transmission (as might be observed under complete information) is strong.

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