The Federal Reserve’s Current Framework for Monetary Policy: A Review and Assessment
We review and assess the monetary policy framework currently used by the Federal Reserve, with special focus on policies that operate through the slope of the term structure, including forward guidance and large scale asset purchases. These slope policies are important at the zero lower bound. We study the performance of counterfactual monetary policies since the Great Recession in the framework of a structural VAR, identified using high-frequency jumps in asset prices around FOMC meetings as external instruments. The intention is to give guidance to policymakers responding to future downturns. In our counterfactuals, we find that slope policies played an important role in supporting the recovery, but did not fully circumvent the zero lower bound. In our simulations, earlier and more aggressive use of slope policies support a faster recovery. The recovery would also have been faster, with the unemployment gap closing seven quarters earlier, if the Fed had inherited a higher level of inflation and nominal interest rates consistent with a higher inflation target coming into the financial crisis recession.
Prepared for the Conference on Monetary Policy Strategy, Tools, and Communication Practices, June 4‐ 5, 2019, Federal Reserve Bank of Chicago. The authors thank Gadi Barlevy, Regis Barnichon, Ben Bernanke, Gabe Chodorow‐Reich, Jordi Galí, Michael Kiley, Ed Nelson, John Taylor, and Mark Watson for helpful discussions, Ben Austin for econometric assistance, and John Coglianese, Don Kim, and Marco Del Negro for providing data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Jonathan H. Wright
I did not receive financial support for this research. I am a professor at Johns Hopkins University and a consultant for the Federal Reserve Banks of Philadelphia and New York. I have no other significant financial interests to disclose. No other party has the right to our paper.
- Without deployment of forward guidance and asset purchases by the Federal Reserve, recovery from the Great Recession would have been...