Monetary Policy in a Zero Lower Bound Environment
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Jackson, Laura. Monetary Policy In a Zero Lower Bound Environment. Chapel Hill, NC: University of North Carolina at Chapel Hill Graduate School, 2014. https://doi.org/10.17615/qm03-vv15APA
Jackson, L. (2014). Monetary Policy in a Zero Lower Bound Environment. Chapel Hill, NC: University of North Carolina at Chapel Hill Graduate School. https://doi.org/10.17615/qm03-vv15Chicago
Jackson, Laura. 2014. Monetary Policy In a Zero Lower Bound Environment. Chapel Hill, NC: University of North Carolina at Chapel Hill Graduate School. https://doi.org/10.17615/qm03-vv15- Last Modified
- March 19, 2019
- Creator
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Jackson, Laura
- Affiliation: College of Arts and Sciences, Department of Economics
- Abstract
- In the wake of the Great Recession, the Federal Reserve lowered the federal funds rate (FFR) target to zero and resorted to unconventional monetary policy. With the nominal FFR constrained by the zero lower bound (ZLB), empirical monetary models cannot be estimated as usual. First, in joint work with Neville Francis and Michael Owyang, we consider whether standard models of monetary policy can be preserved without breaks. We consider whether alternative policy instruments can be considered substitutes for the FFR over the ZLB period. Furthermore, we construct a shadow rate via the methods proposed in Krippner (2012) and Wu and Xia (2014) to proxy for the stance of policy. We ask whether the shadow rate is a sufficient representation of the policy instrument or if the financial crisis requires other modifications. We find that, if using a dataset that spans the pre-ZLB and ZLB environments, the shadow rate acts as a fairly good proxy for monetary policy by producing impulse responses similar to what we'd expect based on the non-ZLB benchmark. However, the linear model exhibits a structural break at the onset of the ZLB and the shadow rate may be insufficient for examining the ZLB period in isolation. Second, I describe the joint dynamics of bond yields, monetary policy and macroeconomic variables within a no-arbitrage affine term structure framework while explicitly modeling the ZLB using the shadow rate. I include data on the unemployment gap and inflation to build a more comprehensive stance of policy, incorporating the influences of unconventional instruments introduced to combat the Great Recession. I find that shadow rate models incorporating macroeconomic factors suggest a more negative shadow rate and a longer expected duration of the ZLB episode than models including only financial data. Also, including the macro data allows the model to better capture the shift in policy focus towards targeting longer-term yields. Finally, the shadow rate produces a proxy for the stance of policy that suggests the unconventional programs achieved a substantial accommodation, in excess of that prescribed by a standard policy rule.
- Date of publication
- December 2014
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- In Copyright
- Advisor
- Froyen, Richard T.
- Owyang, Michael
- Ghysels, Eric
- Francis, Neville
- Parke, William
- Degree
- Doctor of Philosophy
- Degree granting institution
- University of North Carolina at Chapel Hill Graduate School
- Graduation year
- 2014
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- Place of publication
- Chapel Hill, NC
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- There are no restrictions to this item.
- Date uploaded
- April 23, 2015
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