Evaluating Monetary Policy at the Zero Lower Bound

July 21st, 2014
in econ_news

From the Kansas Fed

Evaluating the stance of Federal Reserve monetary policy has become more challenging since the federal funds rate reached its effective lower bound and the Federal Open Market Committee adopted unconventional policies. Hakkio and Kahn use a “shadow” federal funds rate, a summary measure of the total accommodation provided by conventional and unconventional policies, to capture the stance of monetary policy.

Follow up:

This shadow rate is then compared to prescriptions from two policy rules estimated over a period of relative macroeconomic stability. Based on deviations of the shadow federal funds rate from the prescriptions of the estimated policy rules, policy was not sufficiently accommodative in the immediate aftermath of the Great Recession but became considerably more accommodative over time. Both policy rules suggest the time is near for returning to a more conventional approach to monetary policy.

[click on image below to read the entire study]

Source: http://kansascityfed.org/publicat/econrev/pdf/14q2Hakkio-Kahn.pdf

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