Evaluating Unconventional Monetary Policies after the Great Recession
Without deployment of forward guidance and asset purchases by the Federal Reserve, recovery from the Great Recession would have been slower.
After the Federal Reserve effectively slashed interest rates to zero in response to the Great Recession, some doubted that there was much else it could do to accelerate the pace of recovery. The Fed pursued a range of unconventional monetary policy tools when faced with the "zero lower bound" (ZLB) on nominal short-term interest rates. These policies, which were designed to influence long-term rates by changing expectations of future short-term rates, included forward guidance, which Fed officials offer through announcements and summary projections, as well as transactions in the markets for long-term assets. A new study suggests that these novel actions played an important role in the post-recession recovery.
Brexit Uncertainty Is Taking a Toll on the British Economy
In The Federal Reserve's Current Framework for Monetary Policy: A Review and Assessment (NBER Working Paper 26002),
Janice C. Eberly,
James H. Stock, and
Jonathan H. Wright calculate that, absent unconventional monetary policies, the unemployment rate would not have returned to the Congressional Budget Office's estimate of the natural rate until more than one year later than it actually did. (The natural rate of unemployment is the rate that is associated with job changing and labor turnover in an economy operating at full employment.) The researchers find that an expansion of unconventional policies to aggressively lower long-term interest rates early in a crisis would reduce the peak unemployment rate and also hasten the recovery, as shown in the figure. They also find that the rate of inflation would have been approximately 0.2 percentage points lower than it was during the latter part of the recovery if the Fed had not adopted unconventional policy steps.
— Laurent Belsie
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