Question
Read over the article Bernanke and Reinhart (2004) (ZLB_Bernanke_Reinhart2004.pdf) and the article by John C. Williams (Williams2013.pdf), and then answer the following questions. The first
Read over the article Bernanke and Reinhart (2004) (ZLB_Bernanke_Reinhart2004.pdf) and the article by John C. Williams (Williams2013.pdf), and then answer the following questions. The first article by Bernanke and Reinhart was published before the Great Recession, which talks about the potential for alternative monetary policy tools in a zero lower bound environment. The second article by the current New York Fed President John C. Williams was published after the onset of the Great Recession, and talks about the same unconventional policy tools mentioned in the Bernanke and Reinhart article, but in the context of actual implementation.
a. Please describe how "shaping interest rate expectations" (forward guidance) works as a monetary policy tool. Don't forget to pinpoint exactly how this is supposed to stimulate output (i.e. how does this tool end up stimulating C or I).
b. Please describe how "altering the composition of the Central Bank's balance sheet" (operation twist) works as a monetary policy tool. Don't forget to pinpoint exactly how this is supposed to stimulate output (i.e. how does this tool end up stimulating C or I).
c. Please describe how "expanding the size of the Central Bank's balance sheet" (quantitative easing/LSAP) works as a monetary policy tool. Don't forget to pinpoint exactly how this is supposed to stimulate output (i.e. how does this tool end up stimulating C or I).
d. How effective was the Fed's LSAP and altering the composition of the Fed's SOMA holdings during the Great Recession zero lower bound period?
e. How effective was the Fed's forward guidance during the Great Recession's zero lower bound period?
f. What are the costs of low interest rates? Learning objectives in this assignment: - Practice reading economics articles with a critical eye. Learn how to focus on the important points from the article and how to evaluate the author's argument.
g. Please offer your thoughts on these "unconventional monetary policy tools." (e.g. Do you think the Fed will be able to use these tools effectively in the future? Do you think the publics' expectations can really be managed? How well did the Fed manage the transition back to "normal" monetary policy in 2015? Do you think it was right for the Fed to take us back to ZLB to respond to the economic fallout from the coronavirus pandemic? Do you think now is the right time to lift off from ZLB?)
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