Abstract
Monetary policy was too tight in many countries following the financial crisis, due to the lower bound on interest rates. This is likely to have prolonged the recession that followed. This point is illustrated with an assessment of monetary accommodation in the US since the financial crisis, and the accommodation achieved through negative interest rates in countries that have adopted these. The lower bound will likely give rise to considerable economic costs in the future, as it has in the recent past. There is an urgent need to consider how policy tools and frameworks should be adapted.
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Notes
In the Wicksellian sense.
See Ubide (2017) for a similar point.
A different approach to addressing the question is to estimate how much short-term policy rates normally have been cut to achieve a certain reduction in long-term yields, and apply this estimate to QE-associated reductions in long yields. Such estimates suggest that the monetary stimulatory effect of QE through long yields was equivalent to a stimulus of cut in the policy rate of about 2.5 percent-points in late 2013, which is very close to the loosening implied by the Wu-Xia shadow rate. See Ball et al. (2016), pp. 35–36.
Using the alternative shadow rate estimates for the Federal Funds rate by Leo Krippner would suggest a similar tightening in the years after the crisis, but an earlier achievement of monetary accommodation from 2012 already, see http://www.rbnz.govt.nz/research-and-publications/research-programme/additional-research/measures-of-the-stance-of-united-states-monetary-policy.
Data not shown, but can be obtained from the author. See also Ubide (2017).
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The views expressed in this paper are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. Contact: skrogstrup@imf.org. This note is based on panel remarks made at the AEA annual meetings in Chicago, January 2017 NABE sponsored session Responders of First or Last Resort: Central Bank Strategies in an Era of Ultra-Low Interest Rates. I would like to thank Giovanni Dell’Ariccia, Jesper Linde, Machiko Narita, Ted Truman and Niklas Westelius for valuable comments.
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Krogstrup, S. Monetary Policy Accommodation at the Lower Bound. Bus Econ 52, 7–14 (2017). https://doi.org/10.1057/s11369-017-0031-7
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DOI: https://doi.org/10.1057/s11369-017-0031-7