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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa / Nimark, Kristoffer / Wang, Pengfei

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1935-1690
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Monetary Policy When the Nominal Short-Term Interest Rate is Zero

James Clouse / Dale Henderson / Athanasios Orphanides / David H. Small / P.A. Tinsley
Published Online: 2003-09-24 | DOI: https://doi.org/10.2202/1534-5998.1088

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.

Keywords: monetary policy; liquidity trap; zero bound; Federal Reserve Act; open market operations; discount window lending; options

About the article

Published Online: 2003-09-24


Citation Information: Topics in Macroeconomics, ISSN (Online) 1534-5998, DOI: https://doi.org/10.2202/1534-5998.1088.

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©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston. Copyright Clearance Center

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