The Federal Reserve’s Current Framework for Monetary Policy: A Review and Assessment

Janice Eberly, James Stock and Jonathan Wright

No 26002, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We review and assess the monetary policy framework currently used by the Federal Reserve, with special focus on policies that operate through the slope of the term structure, including forward guidance and large scale asset purchases. These slope policies are important at the zero lower bound. We study the performance of counterfactual monetary policies since the Great Recession in the framework of a structural VAR, identified using high-frequency jumps in asset prices around FOMC meetings as external instruments. The intention is to give guidance to policymakers responding to future downturns. In our counterfactuals, we find that slope policies played an important role in supporting the recovery, but did not fully circumvent the zero lower bound. In our simulations, earlier and more aggressive use of slope policies support a faster recovery. The recovery would also have been faster, with the unemployment gap closing seven quarters earlier, if the Fed had inherited a higher level of inflation and nominal interest rates consistent with a higher inflation target coming into the financial crisis recession.

JEL-codes: C22 E43 E52 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: ME
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Citations: View citations in EconPapers (27)

Published as Janice C. Eberly & James H. Stock & Jonathan H. Wright, 2020. "The Federal Reserve's Current Framework for Monetary Policy: A Review and Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 16(1), pages 5-71, February.

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