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Estimating Monetary Policy Rules When Nominal Interest Rates Are Stuck at Zero
Author(s) -
KIM JINILL,
PRUITT SETH
Publication year - 2017
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12391
Subject(s) - economics , zero lower bound , monetary policy , inflation (cosmology) , nominal interest rate , survey of professional forecasters , interest rate , monetary economics , financial crisis , unemployment , zero (linguistics) , censoring (clinical trials) , inflation targeting , macroeconomics , econometrics , keynesian economics , real interest rate , linguistics , philosophy , physics , theoretical physics
Did the Federal Reserve's response to economic fundamentals change with the onset of the Global Financial Crisis? Estimation of a monetary policy rule to answer this question faces a censoring problem since the interest rate target has been set at the zero lower bound since late 2008. Surveys by forecasters allow us to sidestep the problem and to use conventional regressions and break tests. We find that, in the opinion of forecasters, the Fed's inflation response has decreased and the unemployment response has increased, which suggests that the Federal Reserve's commitment to stable inflation has become weaker in the eyes of the professional forecasters.