econintersect .com

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 31 May 2017

Changes In The Risk-management Environment For Monetary Policy

from the Chicago Fed

--this post authored by Jonas Fisher, Francois Gourio, and Spencer Krane

There has been a growing consensus that a lower rate of potential economic growth in the U.S. and greater international demand for U.S. assets will result in a lower real interest rate in the long run.

In response to the massive challenges presented by the global financial crisis, in late 2007 the Federal Open Market Committee (FOMC) began a series of large reductions in its traditional policy tool, the overnight interest rate in the federal funds market. By December 2008 the Committee had lowered the target to its effective lower bound (ELB) of 0 to 25 basis points.

Later, in an attempt to provide additional monetary stimulus, the FOMC implemented nontraditional policy tools, such as large-scale asset purchases and forward guidance about how long the fed funds rate would stay at very low levels.

Evans, Fisher, Gourio, and Krane (2015) (EFGK) argued that if these nontraditional tools are imperfect substitutes for conventional policy, then when interest rates are near the ELB, monetary policy should contain an element of precautionary or risk-management behavior.2 If there is a meaningful risk that future shocks to the economy will leave the central bank constrained by the ELB, then it should conduct looser interest rate policy today than otherwise. They provided two rationales for this conclusion. Looser policy today could preemptively reduce the odds of being constrained by the ELB in the future. It could also offset the depressing effects on output and inflation today of households and firms looking forward to the possibility of the central bank being constrained by the ELB in the future. The optimal interest rate path thus falls below the level one would set for the target rate in the absence of uncertainty. Furthermore, the greater the uncertainty surrounding the possibility of the central bank being constrained by the ELB, the looser the optimal policy setting should be.

[click on image below to continue reading]

Source &elqTrackId=226fded8b7c242c19b19b3039d67201c &elq=db81e6dbb05e4f218bd3f07af901b652 &elqaid=11784&elqat=1

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.

Econintersect Contributors

Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

 navigate econintersect .com


Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2018 Econintersect LLC - all rights reserved