For the discussion assignment this week, search online for an article about the use or the effects of monetary policy in the…

Summary of the Article

According to the article, Measuring the Stance of Monetary Policy on and off the Zero Lower Bound, the Federal Open Market Committee lowered the target range of the federal funds rate which effectively hitting the zero lower bound (ZLB) (Taeyoung Doh and Jason Choi, 1).  This constrained the policy makers from further lowering the target federal fund rate. The constraining of the monetary policy by the ZLB posed a challenge for policy makers and researchers who wanted to measure the stance of the monetary policy in such a way that compares with the pre-ZLB period. Being able to gauge the current stance of the monetary policy in a more precise way is crucial for setting a suitable oath of the monetary policy in the future (Taeyoung Doh and Jason Choi, 14).

According to this article, a shadow interest rate which is comparable to the effective federal funds rate but different from the Wu-Xia shadow rate can be used in measuring the policy stance in any period. However, relaxation of the no-arbitrage restrictions helps in separating out movements in the long-term interest rates because of the common risk factors. Also, macroeconomic variables respond to the shadow rate after the start of the ZLB period in the same way that they responded to the effective federal funds rate all through the pre-ZLB period (Taeyoung Doh and Jason Choi, 19).

Although the shadow rate is greater than the policy prescription all through the ZLB period, the past misses are offset by asset purchases as well as continued stimulus by the forward guidance. Therefore, the most appropriate way moving forward is to move the federal funds rate target nearer to the policy prescription rather than attempting to compensate for the pas misses in the monetary stimulus (Taeyoung Doh and Jason Choi, 20).

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