The Federal Reserve Is Not Very Constrained by the Lower Bound on Nominal Interest Rates
I survey the literature on monetary policy at the zero lower bound (ZLB) and effective lower bound (ELB) to make three main points: First, the Federal Reserve’s forward guidance and large-scale asset purchases are effective monetary policy tools at the Z/ELB. Second, during the 2008–15 U.S. ZLB period, the Fed was not very constrained in its ability to influence medium- and longer-term interest rates and the economy. Third, the risks of the Fed being significantly constrained by the ELB in the future are typically greatly overstated. I conclude that the Federal Reserve is not very constrained by the lower bound on nominal interest rates.
This paper was prepared for a panel discussion on “Monetary Policy at the Effective Lower Bound” at the Fall 2018 Brookings Papers on Economic Activity Conference. I thank Jan Eberly and Jim Stock for inviting me to participate. The views expressed in this paper, and all errors and omissions, are my own and are not necessarily those of the individuals or groups listed above. The research in this paper received financial support from the Brookings Insitution. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Eric T. Swanson, 2018. "The Federal Reserve Is Not Very Constrained by the Lower Bound on Nominal Interest Rates," Brookings Papers on Economic Activity, vol 2018(2), pages 555-572. citation courtesy of