Monetary Policy When the Nominal Short-Term Interest Rate is Zero

By James A. Clouse, Dale W. Henderson, Athanasios Orphanides, David H. Small, P. Tinsley. 2003

280 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/b3b30046e7ae5632ada04a9d6dfedb0d6fe129d8

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Citations in the corpus

Overcoming the Zero Bound on Interest Rate Policy (2000, background): “Clouse et al (1999) report that real short-term interest rates were negative in most of the 12 recessions in the US since the early 1930s.”
The Effects of Quantitative Easing on Interest Rates (2011, background): “A. Event Study Gagnon and others (2010) provide an event study of QE1 based on the announcements of long-term asset purchases by the Federal Reserve in the period from late 2008 to 2009.”
The Zero-Interest-Rate Bound and the Role of the Exchange Rate for Monetary Policy in Japan (2003, unknown): “Clouse et al. (2000) and Johnson et al. (1999) have studied the role of policy options other than traditional open market operations that might help ameliorate the effect of the zero bound.”
Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment (2005, background): “see, for example, Blinder (2000), Bernanke (2002), Clouse et al. (2004), and Bernanke”
Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others (2003, unknown): “Clouse et al. (2003) contains a detailed discussion of monetary policy options with a zero interest rate.”
The Effects of the Bank of Japan's Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach (2007, unknown): “Bernanke and Reinhart (2004), Clouse et al. (2003), Shirakawa (2002), Meltzer (2001), Oda and Okina (2001), and Svensson (2001) presented mainly theoretical or conceptual analyses of alternative strategies for further monetary easing under the zero interest rate environment.”
How Has the Monetary Transmission Mechanism Evolved Over Time (2010, background): “But both the empirical and theoretical channels (e.g., Clouse et al, 2000, and Bernanke, Reinhart, and Sack, 2004) associated with such actions remain far less developed than desirable.”
Zero Bound on Interest Rates and Optimal Monetary Policy (2003, background): “Clouse et al. (2003) also stress that maintenance of the higher money supply until a date at which the zero bound would not otherwise bind represents one straightforward channel through which open markets operations while the zero bound is binding could have a stimulative effect, though they discuss”
Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates (2000, unknown): “8 The policy buffer term is taken from Clouse et al. (1999).”
The Financial Market Impact of Quantitative Easing in the United Kingdom (2012, background): “See, for example, Clouse et al. (2003), Bernanke, Reinhart, and Sack (2004), Ugai (2007), and Borio and Disyatat (2009).”