Monetary Policy Alternatives At The Zero Bound

"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 "noarbitrage" 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"--Abstract.

The success of central banks at reducing inflation through lowering interest rates has increased the likelihood that rates could bottom out at zero during a recession. Ben Bernanke--"the nominee to replace Alan Greenspan as Fed Chairman--"and his coauthors look at the effectiveness of unconventional measures available to monetary policymakers "at the zero bound."

The "Great Recession" and the ensuing weak recovery have led the Federal Reserve (Fed) to re-evaluate its monetary policy. Since December 2008, overnight interest rates have been near zero; at this "zero bound," they cannot be lowered further to stimulate the economy. As a result, the Fed has taken unprecedented policy steps to try to fulfil its statutory mandate of maximum employment and price stability. Congress has oversight responsibilities for ensuring that the Fed's actions are consistent with its mandate. This book analyses the economic effects of these programs, the current economic context in which these policies have been adopted, policy alternatives that the Fed has not pursued to date and their potential effects, potential legislative options for restricting the Fed's pursuit of unconventional monetary policy, and issues surrounding the eventual "exit strategy" from unconventional policy.

Central banks around the world try to influence economic activity by altering nominal interest rates which will have an effect on the real rate. However, this is only possible as long as interest rates are above zero. The case of Japan showed that monetary policy was helpless as nominal rates approached zero. This Book starts with an overview of monetary policy with the restriction that interest rates can not fall below zero. Then optimal monetary policy in a low inflation environment is treated. This is done by using a New Keynesian model with sticky prices. Therefore the model and the necessary optimality conditions will be derived (this will be done extensively in the appendix). After deriving the optimality conditions it will be shown how optimal monetary policy will be conducted. To evaluate the outcome of monetary policy a welfare function will be derived. It will be shown how the welfare function to evaluate the outcome of monetary policy is derived from the utility function of the household. As a result it will be shown that a price level target is welfare maximizing although most central banks nowadays use an inflation target instead. Reasons for an inflation target will be shown in the discussion of the model. The second part of the book describes the inflation dynamics in the euro area to see what monetary authority shall do to prevent the economy from falling into the vicious circle of deflation. Two wage contracting models that describe inflation dynamics in the euro area reasonably well will be explained, the Fuhrer-Moore und the Taylor contracting. After showing the optimal policy it will be discussed how severe the zero bound in the euro area is and what policy alternatives are left when monetary policy is restricted. Finally the results obtained will be discussed to see the pitfalls of price level targeting. The large appendix provides the complete derivation of the model and the optimality conditions.

The "Great Recession" and the ensuing weak recovery have led the Federal Reserve (Fed) to reevaluate its monetary policy. Since December 2008, overnight interest rates have been near zero; at this "zero bound," they cannot be lowered further to stimulate the economy. As a result, the Fed has taken unprecedented policy steps to try to fulfill its statutory mandate of maximum employment and price stability. Congress has oversight responsibilities for ensuring that the Fed's actions are consistent with its mandate. This book analyzes the economic effects of these programs, the current economic context in which these policies have been adopted, policy alternatives that the Fed has not pursued to date and their potential effects, potential legislative options for restricting the Fed's pursuit of unconventional monetary policy, and issues surrounding the eventual "exit strategy" from unconventional policy.

We have the seventh year after the onset of the financial crisis and are still suffering its impacts. To support financing conditions and economic recovery in general, many conventional and unconventional monetary policy measures have been taken. The Federal Reserve Bank in the United States has become known for using them extensively. On the one hand they lowered their operational interest rate to the lower zero bound in December 2008, where it is still stuck, and on the other hand they established diverse lending facilities and purchased assets in large scale. Although costs for support have been enormous, economic recovery has been varyingly strong. While some macro-economic aggregates have exceeded levels and growth before the crisis, others are recovering more slowly. Yet all aggregates are improving at least since early 2010. Nonetheless, extensive policy accommodation is still in place. While tapering of asset purchases since January 2014 is a first step, normalcy is long in coming. As raising interest rates and reducing (longer-term) assets and excess reserves on Fed's balance sheet will be inevitable, there are some further measures to support the exit. But for all measures, timing and pace of leaving are very important to not jeopardise economic recovery so far.

This open access book gives a concise introduction to the practical implementation of monetary policy by modern central banks. It describes the conventional instruments used in advanced economies and the unconventional instruments that have been widely adopted since the financial crisis of 2007–2008. Illuminating the role of central banks in ensuring financial stability and as last resort lenders, it also offers an overview of the international monetary framework. A flow-of-funds framework is used throughout to capture this essential dimension in a consistent and unifying manner, providing a unique and accessible resource on central banking and monetary policy, and its integration with financial stability. Addressed to professionals as well as bachelors and masters students of economics, this book is suitable for a course on economic policy. Useful prerequisites include at least a general idea of the economic institutions of an economy, and knowledge of macroeconomics and monetary economics, but readers need not be familiar with any specific macroeconomic models.

Provides an in-depth overview of the Federal Reserve System, including information about monetary policy and the economy, the Federal Reserve in the international sphere, supervision and regulation, consumer and community affairs and services offered by Reserve Banks. Contains several appendixes, including a brief explanation of Federal Reserve regulations, a glossary of terms, and a list of additional publications.

The paper reviews issues related to the zero lower bound (ZLB) on interest rates and argues that all of the following propositions are invalid: (i) in a ZLB situation, "shaping interest rate expectations is essentially the only tool that central bankers have"(Bernanke, et.al., 2004); (ii) fiscal policy actions such as "helicopter drops" are in theory more effective than monetary policy actions; (iii) the prominent "foolproof way" policy rule of Svensson (2001, 2003) is applicable more generally -i.e., even when exact uncovered interest parity holds- than the alternative exchange-rate rule of McCallum (2000); (iv) both of the exchange-rate strategies described in (iii) are open to the objection that they constitute "beggar-thy-neighbor" approaches, and (v) there is a significant danger of ZLB difficulties stemming from a "deflationary trap" type of equilibrium, as distinct from a "liquidity trap."