The New Normal: Macroeconomic Stabilization Policy Post-Great Recession

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AbstractInterest rates have declined through time such that the lower bound on policy rates is likely to bind more frequently in the future. Unconventional monetary policy tools such as forward guidance and quantitative easing, which were those deployed in the wake of the Great Recession, will become more common policy tools in future recessions. This project will address research questions on monetary policy in the low interest rate environment currently affecting the US and other developed economies. The research will focus on the notion that the adjustment of short-term policy rates is insufficient as the only monetary policy instrument.The first project incorporates constrained financial intermediaries into a standard macroeconomic framework to systematically study different unconventional policy tools such as quantitative easing (QE), forward guidance, and negative interest rate policy. By exploring the substitutability of unconventional policies such as QE with conventional interest rate policy, the project explores overall cost of the zero lower bound on nominal interest rates. The second project looks at the implications of constrained financial intermediaries on fiscal policy by specifically focusing on the magnitude of the government spending multiplier and its dependence on the zero lower bound. The third project incorporates a realistic model of the term structure of interest rates so as to study certain monetary policy tools such as the maturity extension program. The final project considers household heterogeneity and incomplete markets within the framework developed in the first project. This project studies the distributional implications of unconventional monetary policies such as QE.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.