Monetary Policy When the Nominal Short-Term Interest Rate is Zero
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James Clouse
In an environment of low inflation, the Federal Reserve faces the possibility that it may not have provided enough monetary stimulus even though it had pushed the short-term nominal interest rate to its lower bound of zero. Assuming the nominal Treasury-bill rate had been lowered to zero, this paper considers whether further open market purchases of Treasury bills could spur aggregate demand through increases in the monetary base. Such action may be stimulative by increasing liquidity for financial intermediaries and households; by affecting expectations of the future paths of short-term interest rates, inflation, and asset prices; through distributional effects; or by stimulating bank lending through the credit channel. This paper also examines the alternative policy tools that are available to the Federal Reserve in theory, and notes the practical limitations imposed by the Federal Reserve Act. The tools the Federal Reserve has at its disposal include open market purchases of Treasury bonds and certain types of private-sector credit instruments; unsterilized and sterilized intervention in foreign exchange; lending through the discount window; and, in some circumstances, may include the use of options.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules
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- The Money Metric, Price and Quantity Aggregation and Welfare Measurement
- Parente and Prescott's Theory May Work in Practice But Does Not Work in Theory
- Explaining Movements in the Labor Share
- Endogenous Growth with Intertemporally Dependent Preferences
- On the Friedman Rule in Search Models with Divisible Money
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- Advances Article
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Articles in the same Issue
- Topics Article
- Balance of Payments Constrained Non-Scale Growth and the Population Puzzle
- The Human Capital Constraint: Of Increasing Returns, Education Choice and Coordination Failure
- ``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare
- How Prudent are Community Representative Consumers?
- Price Distribution in a Symmetric Economy
- The Role of Stock Markets in Current Account Dynamics: a Time Series Approach
- Shiftwork, Adjustment Costs and Uncertainty
- How Do Future Constraints Affect Current Investment?
- The Politics of Endogenous Growth
- Sticky Prices, Coordination and Enforcement
- Fractional Integration with Bloomfield Disturbances in the Specification of Real Output in the G7 Countries
- Monetary Policy When the Nominal Short-Term Interest Rate is Zero
- High-Tech Human Capital: Do the Richest Countries Invest the Most?
- Substitution Elasticities and Investment Dynamics in Two-Country Business Cycle Models
- Contributions Article
- On Modeling the Effects of Inflation Shocks: Comments and Some Further Evidence
- Optimal Monetary Policy and the Correlation between Prices and Output
- Are Banking Supervisory Data Useful for Macroeconomic Forecasts?
- An Analytical Approach to the Welfare Cost of Business Cycles and the Benefit from Activist Monetary Policy
- Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules
- Idle Capital and Long-Run Productivity
- The Money Metric, Price and Quantity Aggregation and Welfare Measurement
- Parente and Prescott's Theory May Work in Practice But Does Not Work in Theory
- Explaining Movements in the Labor Share
- Endogenous Growth with Intertemporally Dependent Preferences
- On the Friedman Rule in Search Models with Divisible Money
- Finance Causes Growth: Can We Be So Sure?
- Advances Article
- Where Is the Natural Rate? Rational Policy Mistakes and Persistent Deviations of Inflation from Target
- Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index
