Measuring the Constraint of the Zero lower Bound on Monetary Policy in the United States

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Hecksher, S. (2018). Measuring the Constraint of the Zero lower Bound on Monetary Policy in the United States. Unc Charlotte Electronic Theses And Dissertations.
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Abstract

After the financial crisis in 2007-2008 the Federal Reserve lowered its target interest rate down to the zero lower bound (ZLB) forcing itself towards unconventional monetary policy. Attempting to mitigate the constraint that is the ZLB, the Fed enacted the use of forward guidance through official communications as well as large scale asset purchases. The purpose of this paper is to focus on the Fed's attempted policy action to shape market expectations through communication and interest rate targeting in three distinct periods: the pre-ZLB era, the ZLB era, and the post-ZLB era. By extracting the "surprise" element of both Fed communication and the fed funds rate during the three periods I quantify the effectiveness of the Fed's conventional and unconventional policy and thus determine how much of a constraint the ZLB actually is on monetary policy. I find that interest rate policy had a significant impact pre-ZLB and that FOMC intentions and market expectations have aligned post-ZLB leaving little to surprise. Fed communication, on the other hand, measured through surprise changes in tone, do not impact Treasury yields of various maturities.

Details
Author

Hecksher, Samuel

Title

Measuring the Constraint of the Zero lower Bound on Monetary Policy in the United States

Physical Description

1 online resource (39 pages) : PDF

Date

2018

Degree Granting Institution

University of North Carolina at Charlotte

Abstract

After the financial crisis in 2007-2008 the Federal Reserve lowered its target interest rate down to the zero lower bound (ZLB) forcing itself towards unconventional monetary policy. Attempting to mitigate the constraint that is the ZLB, the Fed enacted the use of forward guidance through official communications as well as large scale asset purchases. The purpose of this paper is to focus on the Fed's attempted policy action to shape market expectations through communication and interest rate targeting in three distinct periods: the pre-ZLB era, the ZLB era, and the post-ZLB era. By extracting the "surprise" element of both Fed communication and the fed funds rate during the three periods I quantify the effectiveness of the Fed's conventional and unconventional policy and thus determine how much of a constraint the ZLB actually is on monetary policy. I find that interest rate policy had a significant impact pre-ZLB and that FOMC intentions and market expectations have aligned post-ZLB leaving little to surprise. Fed communication, on the other hand, measured through surprise changes in tone, do not impact Treasury yields of various maturities.

Genre

masters theses

Subjects--Topics

Economics

Degree

M.S.

Subject Area

Economics

Advisor(s)

McGregor, Rob Roy

Committee Members

Gaggl, Paul
Iqbal, Azhar

Degree Note

Thesis (M.S.)--University of North Carolina at Charlotte, 2018.

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Rights Holder Information

Copyright is held by the author unless otherwise indicated.

Identifier

Hecksher_uncc_0694N_11726

Permalink

http://hdl.handle.net/20.500.13093/etd:698