Zero Bound on Interest Rates and Optimal Monetary Policy

Eggertsson, Gauti B.; Woodford, Michael

doi:10.1353/eca.2003.0010

Cited by 1,716 publications

(1,894 citation statements)

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“…However, the conditions under which such communications are effective remain unclear. Krugman (1998) and Eggertsson and Woodford (2003) implicitly assume that monetary policy makers can manipulate private sector expectations to be consistent with any rational expectations equilibrium. Unsurprisingly, this assumption makes proper communication policy very effective at improving macroeconomic outcomes.…”

Section: Measurement With High-frequency Datamentioning

confidence: 99%

“…This shock has been shown by Justiniano et al (2010) and others to be an important driver of consumption fluctuations. In addition it is often used, for example by Eggertsson and Woodford (2003), to motivate why monetary policy might become constrained by the ELB and so it is particularly relevant for our analysis. We assume ε b t evolves according to…”

Section: Householdsmentioning

confidence: 99%

“…Just as Odysseus bound himself to his ship's mast so he could enjoy the Sirens' song without succumbing to the inevitable temptation to drown himself while swimming towards them, a central banker can improve welfare by publicly committing to a time-inconsistent plan that uses expectations of suboptimal future outcomes to improve current economic conditions. The forward guidance that implements the time-inconsistent Ramsey plans in Eggertsson and Woodford (2003) is Odyssean.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Forward Guidance and Macroeconomic Outcomes since the Financial Crisis

Campbell

Fisher

Justiniano

et al. 2017

NBER Macroeconomics Annual

148

153

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper studies the effects of FOMC forward guidance. We begin by using high frequency identification and direct measures of FOMC private information to show that puzzling responses of private sector forecasts to movements in federal funds futures rates on FOMC announcement days can be attributed entirely to Delphic forward guidance. However a large fraction of futures rates' variability on announcement days remains unexplained, leaving open the possibility that the FOMC has successfully communicated Odyssean guidance. We then examine whether the FOMC used Odyssean guidance to improve macroeconomic outcomes since the financial crisis. To this end we use an estimated medium-scale New Keynesian model to perform a counterfactual experiment for the period 2009q1-2014q4, in which we assume the FOMC did not employ any Odyssean guidance and instead followed its reaction function from before the crisis as closely as possible while respecting the effective lower bound. We find that a purely rule-based policy would have delivered better outcomes in the years immediately following the crisis than FOMC forward guidance did in practice. However starting toward the end of 2011, after the Fed's introduction of "calendar-based" communications, the FOMC's Odyssean guidance appears to have boosted real activity and moved inflation closer to target. We show that our results do not reflect Del Negro, Giannoni, and Patterson (2015)'s forward guidance puzzle. JEL Codes: E0. Terms of use: Documents in

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Section: Measurement With High-frequency Datamentioning

confidence: 99%

Section: Householdsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Forward Guidance and Macroeconomic Outcomes since the Financial Crisis

Campbell

Fisher

Justiniano

et al. 2017

NBER Macroeconomics Annual

148

153

View full text Add to dashboard Cite

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“…This …nding is attributed to the fact that, unlike Eggertsson and Woodford (2003), we do not assume any household money satiation level. This strong assumption, which intends to allow the zero interest rate bound to be reached, is sometimes invoked for the sake of simplicity, 17 although this is not our purpose here (also because the zero bound was not reached during our analysis).…”

Section: Policy Implicationsmentioning

confidence: 99%

Money and monetary policy in Israel during the last decade

Benchimol¹

2016

Journal of Policy Modeling

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This study examines how money and monetary policy have in‡uenced output and in ‡ation during the past decade in Israel by comparing two New Keynesian DSGE models. One is a baseline separable model (Galí, 2008) and the other assumes non-separable household preferences between consumption and money (Benchimol and Fourçans, 2012). We test both models by using rolling window Bayesian estimations over the last decade (2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013). The results of the presented dynamic analysis show that the sensitivity of output with respect to money shocks increased during the Dot-com, Intifada, and Subprime crises. The role of monetary policy increased during these crises, especially with regard to in ‡ation, even though the effectiveness of conventional monetary policy decreased during the Subprime crisis. In addition, the non-separable model including money provides lower forecast errors than the baseline separable model without money, while the in ‡uence of money on output ‡uctuations can be seen as a good predictive indicator of bank and debt risks. By impacting and monitoring households'money holdings, policy makers could improve their forecasts and crisis management through models considering monetary aggregates.

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“…Eggertsson and Woodford (2003) discuss the transmission mechanism of monetary policy at the ZLB in a dynamic stochastic general equilibrium model, and argue that a recession can be reversed if the central bank is able to commit to keeping interest rates low for a long period.…”

Section: Introductionmentioning

confidence: 99%

Measuring the Effect of the Zero Lower Bound on Monetary Policy

Carvalho

Hsu

Nechio

2016

ERWP

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The Zero Lower Bound (ZLB) on interest rates is often regarded as an important constraint on monetary policy. To assess how the ZLB affected the Fed's ability to conduct policy, we estimate the effects of Fed communication on yields of different maturities in the pre-ZLB and ZLB periods. Before the ZLB period, communication affects both shortand long-dated yields. In contrast, during the ZLB period, the reaction of yields to communication is concentrated in longer-dated yields. Our findings support the view that the ZLB did not put such a critical constraint on monetary policy, as the Fed retained some ability to affect long-term yields through communication. JEL classification codes: E43, E52, E58

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Zero Bound on Interest Rates and Optimal Monetary Policy

Cited by 1,716 publications

References 23 publications

Forward Guidance and Macroeconomic Outcomes since the Financial Crisis

Forward Guidance and Macroeconomic Outcomes since the Financial Crisis

Money and monetary policy in Israel during the last decade

Measuring the Effect of the Zero Lower Bound on Monetary Policy

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