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Working Paper
Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit
We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in ...
Discussion Paper
Balance Sheet Policies in an Evolving Economy: Some Modelling Advances and Illustrative Simulations
Once considered "unconventional," balance sheet policies have become an integral part of the toolkit of many central banks. Increased reliance on balance sheet policies reflects in part a decline in the neutral level of interest rates, which limits central banks' ability to cut their policy rates to support the economy during downturns, and many observers expect that neutral level to remain low relative to its historical average in the coming decades.
Working Paper
Issues in the Use of the Balance Sheet Tool
This paper considers various ways of using balance sheet policy (BSP) to provide monetary policy stimulus, including the BSPs put in place by the Federal Reserve in the wake of the Global Financial Crisis, the choice between fixed-size and flow-based asset purchase programs, policies targeting interest rate levels rather than the quantity of asset purchases, and programs aimed at increasing more direct lending to households and firms. For each of these BSP options, we evaluate benefits and costs. We conclude by observing that BSPs’ relative effectiveness and thus optimal configuration will ...
Working Paper
The Federal Reserve's balance sheet and overnight interest rates
This paper provides a comprehensive study of the interplay between the Federal Reserve's balance sheet and overnight interest rates. We model both the supply of and the demand for excess reserves, treating assets of the Federal Reserve as policy tools, and estimate the effects of conventional and unconventional monetary policy on overnight funding rates. We find that, in the current environment with quite elevated levels of reserves, the effect of further monetary policy accommodation on overnight interest rates is limited. Further, assuming a path for removing monetary policy accommodation ...
Discussion Paper
Simulating the Macroeconomic Effects of Unconventional Monetary Policies
In this note, we describe a method for calculating simulation results and demonstrate the benefits of the integrated model by analyzing a policy that entails an endogenous balance sheet response.
Working Paper
Demand for M2 at the Zero Lower Bound: The Recent U.S. Experience
In this paper, we re-examine the relationship between money and interest rates with a focus on the past few years, when the opportunity cost of M2 has dropped below zero. Until the late 1980s, a stable relationship between monetary aggregates and the opportunity cost of holding money--measured as the spread between the three-month Treasury bill yield and the deposit-weighted average return on M2 assets--existed, and played an integral role in the conduct of monetary policy (e.g., Moore et al.(1990)). This relationship broke down in the early 1990s, when M2 velocity increased beyond the range ...
Discussion Paper
The Evolution of the Federal Reserve’s Agency MBS Holdings
The Federal Reserve (Fed) utilized its balance sheet as a monetary policy tool in response to the Global Financial Crisis (GFC) and the COVID-19 pandemic, acquiring large quantities of Treasury and agency securities. In 2022, the Fed began to reduce the size of its securities portfolio held in the System Open Market Account (SOMA) by allowing securities to roll off its balance sheet in amounts up to specific monthly redemption caps for Treasury securities and agency securities.
Working Paper
The Effect of Bank Supervision on Risk Taking : Evidence from a Natural Experiment
In this paper, we exploit a natural experiment in which thrifts in several states witnessed an exogenous reduction in supervisory attention to assess the effect of supervision on financial institutions' willingness to take risk. We show that the affected institutions took on much more risk than their unaffected counterparts in other districts that were subject to identical regulations. Subsequent to the emergency enlistment of examiners and supervisors from other parts of the country two years later, additional risk taking by the affected thrifts ceased. We find that the expansion in risk ...