Comment

Abstract

In 2008, for the first time since the Great Depression, the Federal Reserve encountered the zero lower bound (ZLB) on the nominal interest rate. The Fed’s target rate, the overnight federal funds rate, fell effectively to zero in the fall as the central bank’s emergency lending programs rapidly increased the supply of bank reserves. Then at its December 2008 meeting, the FederalOpenMarketCommittee (FOMC), the Fed’smonetary policymaking body, formally set the target range for the funds rate at 0 to 25 basis points—effectively zero. With the economy in free fall and little scope for additional rate cuts, the FOMC then turned to nonstandard policy tools, including forward guidance (communication about the likely or intended forward path of the policy rate) and large-scale asset purchases, also known as quantitative easing. Both tools were used actively during the Great Recession and the subsequent recovery. Did the nonstandard tools work? The current consensus of central bankers and economists is that forward guidance and asset purchases eased financial conditions and supported the economy, with fewer adverse side effects than many predicted. Accordingly, these policies appear to have become permanent components of the monetary tool kit, both in the United States and abroad. However, the prevailing view also holds that the overall response of monetary policy was effectively constrained by the ZLB; that is, although nonstandard policies evidentlymitigated the downturn, their use did not fully compensate for the inability of the Fed to cut short-term rates significantly further. This view, and the concern that in a world of low neutral interest rates future encounters with the ZLB may be frequent, has led the Fed and other central banks to actively consider new tools and new policy frameworks for dealing with the ZLB constraint. In contrast to this prevailing view, however, a small literature has adduced indirect evidence to argue that the Fed’s response to the Great