Monetary Policy When the Nominal Short-Term Interest Rate is Zero

James Clouse, Dale Henderson, Athanasios Orphanides, David H. Small, P.A. Tinsley
2003 Topics in Macroeconomics  
In an environment of low inflation, the Federal Reserve faces the risk that real interest rates could remain elevated and that it was not providing enough monetary stimulus even though it had pushed the short-term nominal interest rate to its lower bound of zero. Assuming the nominal Treasury-bill rate had been lowered to zero, this paper considers whether further open market purchases of Treasury bills could spur aggregate demand through increases in the monetary base that may stimulate
more » ... te demand by increasing liquidity for financial intermediaries and households; by affecting expectations of the future paths of short-term interest rates, inflation, and asset prices; or by stimulating bank lending through the credit channel. This paper also examines the alternative policy tools that are available to the Federal Reserve in theory, and notes the practical limitations imposed by the Federal Reserve Act. The tools the Federal Reserve has at its disposal include open market purchases of Treasury bonds and private-sector credit instruments (at least those that may be purchased by the Federal Reserve); unsterilized and sterilized intervention in foreign exchange; lending through the discount window; and, in some circumstances, may include the use of options.
doi:10.2202/1534-5998.1088 fatcat:slodubzjffe3lgw5jxifcy3toq