by Michael T. Belongiaa and Peter N. Irelandb
Unconventional policy actions, including quantitative easing and forward guidance, taken during and since the financial crisis and Great Recession of 2007-09, allowed the Federal Reserve to influence long-term interest rates even after the federal funds rate hit its zero lower bound. Alternatively, similar policy actions could have been directed at stabilizing the growth rate of a monetary aggregate in the face of severe disruptions to the financial sector and the economy at large. A structural vector autoregression suggests it would have been feasible for the Fed to target the growth rate of a Divisia monetary aggregate once the federal funds rate had reached its zero lower bound and that doing so would have supported a stronger, more rapid recovery.
JEL Code: E21, E32, E37, E41, E43, E47, E51, E52, E65.
Full article (PDF, 46 pages, 6267 kb)
a University of Mississippi
b Boston College