Federal Reserve Bank of Dallas

Globalization and Monetary Policy Institute

Working Paper No. 240
http://www.dallasfed.org/assets/documents/institute/wpapers/2015/0240.pdf

Monetary Policy Expectations and Economic Fluctuations

at the Zero Lower Bound*
Rachel Doehr
Claremont McKenna College
Enrique MartnezGarca
Federal Reserve Bank of Dallas
May 2015
Abstract
Using a panel of surveybased measures of future interest rates from the Survey of
Professional Forecasters, we study the dynamic relationship between shocks to monetary
policy expectations and fluctuations in economic activity and inflation. We propose a small
scale structured recursive vector autoregression (VAR) model to identify the
macroeconomic effects of changes in expectations about monetary policy. Our results show
that when interest rates are away from the zerolower bound, a perception of higher future
interest rates leads to a significant rise in current measures of inflation and a rise in
economic activity. However, when interest rates approach zero, the effect on economic
activity is the opposite, with significant but lagged decreases in economic activity following
an upward revision to expected future interest rates. The impact of changes in expectations
about monetary policy is robust when we control for other features of the transmission
mechanism (e.g., longterm interest rates, quantitative easing, exchange rate movements and
even oil price shocks). Our findings also show that monetary policy expectations contribute
up to 34 percent to the variability of economic activity (and 24 percent on inflation) while
policy rates are fixed at the zerolower bound. This evidence points to the importance of
managing monetary policy expectations (forward guidance) as a crucial policy tool for
stimulating economic activity at the zerolower bound.
JEL codes: E30, E32, E43, E52

Rachel Doehr, Claremont McKenna College, 742 Amherst Avenue, #366, Claremont, CA 91711. 858
4447233, rdoehr16@cmc.edu. Enrique MartnezGarca, Research Department, Federal Reserve Bank of
Dallas, 2200 N. Pearl Street, Dallas, TX 75201. 214-922-5262. enrique.martinez-garcia@dal.frb.org. We
thank Nathan Balke, Andrea Civelli, Vctor Valcrcel and Mark Wynne for helpful suggestions. We
gratefully acknowledge the research assistance provided by Bradley Graves and Valerie Grossman, and the
support of the Federal Reserve Bank of Dallas. We base our econometric analysis on the STATA program
pvar.ado of Love and Ziccino (2006). All remaining errors are ours alone. The views in this paper are those
of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal
Reserve System.

1. Introduction
Agrowingstrandoftheliteratureonexpectationsdrivenbusinesscycleshastriedto
empiricallyanswerthequestionofhowchangesinexpectationsoffuturemacroeconomic
variablesdrivethecurrentmacroaggregates.LeducandSill(2013)usesurveybasedforecasts
ofeconomicactivityfortheU.S.upto2008(extendedto2010)toshowthatchangesin
expectationsoffutureeconomicactivityareasignificantdriverofrealeconomicactivityand
inflation.LeducandSill(2013)findthataperceptionthatgoodtimesareaheadtypicallyleads
toasignificantriseincurrentmeasuresofeconomicactivityandinflationandamonetary
policytightening.LeducandSill(2013)interpretthisasevidencethatchangesinexpectations
abouteconomicactivityandtheirinteractionwithmonetarypolicyareasignificantdriverof
businesscycles.
TheworkofLeducandSill(2013)supportstheideaofanexpectationsdrivenbusiness
cycle,andquantifiestheimpactofchangesinexpectationsaboutthestateoftheworld.This
paperexpandsonthecurrentliteraturebyexaminingtheeffectofinterestrateexpectationson
themacroeconomyandonthetransmissionmechanismofmonetarypolicy.Inthatregard,we
tackletwoseparateissuesthatdonotexplicitlyariseintheprecedingliteratureontheroleof
expectationsinthebusinesscycle.
First,weexaminechangesintheperceptionofmonetarypolicyitself.LeducandSill
(2013)considerchangesinexpectationsabouteconomicactivity,butdonotaccountfor
changesinperceptionsaboutmonetarypolicythatmayotherwisebeunrelated.Ourapproach
insteadisinlinewiththerecenttheoreticalliteratureontheroleoftheexpectationschannel
formonetarypolicyaspolicyratesbecomeunresponsive.EggertssonandWoodford(2003)
1

arguethatthefuturepathofshortterminterestratesaffectslongterminterestratesand,
therefore,influencesagentsoptimaldecisionsaswellastheirperceptionsabouttheeconomy.
Carlstrometal.(2012)andDelNegroetal.(2013),amongothers,havealsofoundlarge
macroeconomiceffectsonoutputandinflationfromthemanagementofexpectationsoffuture
interestrates(forwardguidance)wheninterestratesthemselvesbecomeunresponsivefora
periodoftime.Theirfindingssuggestthatlongterminterestratesdrivethesemacroeconomic
effects,soweconsiderthisdimensionexplicitlyinmodelingthetransmissionchannelof
monetarypolicy.
Second,weaccountforthefactthatinterestrateswerefixedatthezerolowerbound
duringmostoftheperiodfollowingthe2008financialrecession.Thetheoreticalliterature
suggeststhatchangesinperceptionsaboutfutureinterestratescanhavesignificanteffects
whenpolicyratesarefixed,providingrationaleforpoliciesthatprovideforwardguidanceas
policyratesareboundatzero.TheworkofLeducandSill(2013)doesnotconsiderthe
possibilityofabreakintheeffectthatchangesinperceptionsaboutthefuturehaveoncurrent
economicactivityandinflation,giventhattheirsamplecontainsonlyafewobservationswith
interestratesnearzero.Wethereforeextendtheexistingliteraturebyexaminingtheshifting
roleofmonetarypolicyexpectations,inparticularbyconsideringtheeffectthezerolower
boundhasonthetransmissionofmonetarypolicyandshockstoexpectationsonfuture
monetarypolicy.
Forthosereasons,wefocusourattentionontheimplicationsofchangesinperceptions
aboutmonetarypolicyoverthebusinesscycle,especiallyinthewakeofthe2008financialcrisis

andthedecisionbytheFederalReservetoturntounconventionalmonetarypolicy.As
documentedinContessiandLi(2013a,2013b),forwardguidancehasplayedasignificantrolein
theconductofmonetarypolicyfortheU.S.aswellasinanumberofothermajoradvanced
economiesduringthisperiod.Intheory,byprovidingforwardguidanceaboutfuturepolicy
rates,acentralbankcanaffectinterestrateexpectationsandlongtermrates(assuggestedin
EggerstonandWoodford(2003),Carlstometal.(2012)andDelNegroetal.(2012)).Filardoand
Hofmann(2014)showthathistorically,forwardguidancehashadasignificanteffectoninterest
rateexpectations.
Thishasbecomeanissueofparticularimportanceforpolicymakersnotonlyduetothe
2008financialcrisis,butalsointhecontextofthehistoricaldownwardtrendininterestrates
experiencedoverthepast40years(see,e.g.,Hamiltonetal.(2015)).Inanenvironmentwith
lowinterestrates,episodeswhenpolicyrateshitthezerolowerboundorsimplybecomefixed
atlowlevelsforanextendedperiodoftimearelikelytobemorefrequent.2Weaimtoprovide
aquantificationoftheshiftthatoccursonthemacroeconomicresponsetoshockstoexpected
futuremonetarypolicyasinterestratesapproachthezerolowerboundthatcanguide
policymakerswhenconsideringthetradeoffsofimplementingforwardguidance.
Inthispaper,weempiricallyexaminehowinterestrateexpectationsinfluencethe
transmissionmechanismofmonetarypolicyandaffectcurrentandfuturerealeconomic

Thedeclineinthenaturalratetogetherwiththesuccessofmonetarypolicyinattaininglowinflationratesafter
thehighinflationofthe1970scontributedtomovenominalratestowardthezerolowerboundevenbeforethe
2008financialcrisis.TheconcernraisedbySummers(2014)amongstothersisthatthisprolongeddeclineof
lowinterestratesisasignofsecularstagnationwiththeprospectofafutureoflowerpercapitaincomegrowth
andcontinuedlowinterestrates.Analternativeviewisthatthepastweakgrowthandlowinterestratesmay
reflecttheeffectsofadebtsupercycle(see,e.g.,LoandRogoff(2015)).Afterdeleveragingandborrowing
headwindssubside,expectedgrowthratesmayriseagainandleadtohigherinterestratesinthemediumterm.

activityandinflation.Weusepaneldataofexpectationsaboutinterestratesacrossforecasters
intheSurveyofProfessionalForecastersandastructuredrecursiveVARforouranalysis.By
segmentingthepaneldatasetintothepre2008andpost2008periods,weareableto
differentiatebetweentheeffectsofpolicyexpectationsshockswhenpolicyratesareabove
zerocomparedtowhentheyareatthezerolowerbound.Wefindthatmonetarypolicy
expectationsexplainsubstantiallymoreofthefluctuationinunemploymentandinflationthan
theactualpolicyrateitselfdoes.Mostnotably,duringthepost2008periodatthezerolower
bound,expectationsshocksaccountfor8percentand18percentofthefluctuationsin
unemploymentandinflation(1yearahead)respectively,andcloseto34percentand24
percentofthevariability(5yearsahead).Thesefindingssuggestthatthecontributionof
expectationsshockstofluctuationsinrealeconomicactivitybecomesstrongeratlonger
horizons.Wealsoprovideevidenceofasignificantstructuralshiftinthedynamicresponsesof
realeconomicactivity(andinflation)toexpectationsshockswheninterestratesareatthezero
lowerbound.
Awayfromthezerolowerbound,apositiveinnovationtofutureexpectedinterestrates
causesadecreaseintheunemploymentrateandamodestincreaseininflation.However,at
thezerolowerbound,apositiveinnovationtopolicyexpectationsleadstoalaggedbut
substantialincreaseinunemployment,andadecreaseininflationafterinitiallyovershooting.
Whenratesareboundedbyzero,interestrateexpectationsprovidesomemonetary
accommodationbyinfluencingthelongtermrateseventhoughtheactualpolicyratehasbeen
renderedineffective.Theseresultspointtotheimportanceofmanagingmonetarypolicy
expectations(forwardguidance)forconductinganeffectivemonetarypolicy,andprovide
4

furtherilluminationintotheactualtransmissionmechanismofmonetarypolicyitself,in
particularlyatthezerolowerbound.
Therestofthepaperisorganizedasfollows:Section2discussestheroleofthe
expectationschannelformonetarypolicy,Section3presentsadescriptionofthedata,Section
4providesourempiricalmethodology,Section5presentstheempiricalresultsandour
economicinterpretation,andSection6summarizesourfinalconclusions.

2. AnOverviewoftheExpectationsChannelofMonetaryPolicy
Thetermstructureofinterestratesistheprimarycrucialpartofthetransmission
channelofmonetarypolicy.Undertheassumptionthatmonetarypolicyactionscanbe
summarizedwiththeshorttermpolicyrate,policytransmissiontotherealeconomyandits
effectsonaggregatedemanddependnotonlyoncurrentpolicyratesbutalsoonthe
perceptionsaboutmonetarypolicygoingforwardthatfactorintolongerterminterestrates(a
pointalsostressedbyFilardoandHoffman(2014)).Forzerocouponbonds,anexpectation
basedinterpretationoflongterminterestratescontainsanaverageofexpectedshortterm
ratesoverthematurityofthebondandatermandriskpremiumcomponent.Thelogyieldto
maturityonannperiodnominalbond,in,t,mayberepresentedas

in ,t

1
n

n 1
z 0

Et i1,t z n ,t ,

(1)

whereEtdenotesexpectationsattimet;i1,t+jistheshort(oneperiod)nominalrateinthejth
periodoftheforecastinghorizon;andn,tisthetermandriskpremiarequiredbyinvestorsto
5

compensatethemforholdinglongertermbondsinsteadofrollingovershorttermdebt.
Althoughtheshortterminterestratecanbeviewedasausefulsummaryofthecurrentstance
ofmonetarypolicyresponses,itisnotthemostaccurateindicatorofthetransmissioneffectsof
monetarypolicyonaggregatedemand,assuggestedbyBernankeandBlinder(1992)among
others.
Itis,however,nontrivialtodiscernfromlongterminterestrateswhethershocksto
thoselongtermyieldsareduetounanticipatedchangesinpolicyrateexpectations,orthe
latterterm.Thistermn,tdependsonilliquidity,defaultanddurationrisk.Durationriskrefers
totheassetpricefluctuationsinvestorsareexposedtoduetochangesininflationandinterest
ratesoverthematurityofthebond.Riskaverseinvestorsdemandapremiumforthisrisk,but
thezerolowerboundmayhaveambiguouseffectsoninterestratevolatilityandthe
subsequentamountofriskthatispricedintolongertermyields.Toillustratetheconnection
withthezerolowerbound,letusassumethatthedistributionofpolicyratesiswell
approximatedwithatruncatedGaussiandistribution.Thezeroboundinducesapositiveand
increasinglysignificantbiasinexpectednominalratesasthemodeoftheinterestrate
distributionslidestowardzero.Thisessentiallymeansthatthecloserthepolicyrateistozero
themoreitbecomesaonewaybetwithratesstayingthesameorgoingupbutnotdownin
thefuture.Thispositivebiaspreventsthevolatilityofthepolicyratefromfallingasthemodeof
thedistributionapproacheszero.Theindirecteffectofapositivebiasinexpectedrateson
policyratevolatility,liketheeffectofincreaseduncertaintyregardingthefuturemonetary
policypath,isconsistentwiththeexistenceofasignificant(andevenrising)premiaonlong

termratesaspolicyratesapproachzero.Theeffectofabindinglowerboundonthepolicyrate
insomemodelsmayevenleadtoincreasesinthevolatilityofrealactivityandinflation.3
Consequently,relyingonlongterminterestratestomodelthetermstructureof
interestratesandthetransmissionmechanismofmonetarypolicymayconfoundtheevidence,
aslongtermyieldscannotdisentangletheeffectofchangesintheexpectationoffuturepolicy
fromuncertaintyaboutthefuturepathofpolicy.Togetaroundthisconcernandexplorethe
effectivenessofthetransmissionmechanismofmonetarypolicyweusesurveybased
expectationsofthefuturepolicyratetoisolatetheexpectationpolicytermandexplorehow
unexpectedinnovationstoexpectationsonmonetarypolicydrivemacroeconomicperformance
(andhowthetransmissionofthoseinnovationscompareswiththatofinnovationstothepolicy
rate,especiallyatthezerolowerbound).
Examiningtheroleinnovationstopolicyexpectationshasonmacroeconomicconditions
furtherilluminatesthetransmissionmechanismofmonetarypolicy.ThestandardNew
Keynesiantheoryarguesthat,duetonominalrigidities,apolicyinducedincreaseintheFederal
Fundsratetranslatesintochangesintherealrateofinterestaboveitsnaturalrate,4which
enticeseconomicagentstoanticipateorpostponeconsumption,aswellasinfluences
investmentdecisions.Whenconventionalmonetarypolicycannolongerbeenactedtoprovide

FilardoandHofmann(2014,pp.4244)moregenerallydiscussthreewaysinwhichmanagingpolicyexpectations
canaffecttheeconomy:byaffectingtheperceptionsoffutureexpectedinterestrates,byloweringmarket
volatilityoninterestrateexpectations,andbymakingmarketslesssensitivetoothernewsshocks.Whilewefocus
ontheperceptionsaboutfuturemonetarypolicy,theothereffectsnotedbytheseauthorsarerelevanttoour
discussionaswell.Wemustrecognizethatwhetheractivelymanagedbypolicymakersthroughforwardguidance
ornot,wemustdisentangletheeffectsofinterestrateexpectationsfromthoseofuncertaintyaboutmonetary
policyitself,whichmanifestsitselfinchangestotheriskpremiumonlongertermyields,especiallyatthezero
lowerbound.
4
ThenaturalorWicksellianrateissimplydefinedastherealinterestratethatwouldprevailabsentallnominal
rigiditiespreventingthecostlessandinstantaneousadjustmentofpricesintheeconomy.

monetaryaccommodationduetothezerolowerbound,theaforementionedexpectations
theoryofthetermstructureofinterestratessuggeststhatexpectationsaboutfuturepolicy
becomeamajorchannelforthetransmissionofmonetarypolicy.Ifacentralbankcan
effectivelymanagetheprivateexpectationsaboutthefuturepolicypath,thenacredible
promiseoflowershortterminterestrateswillbeincorporatedintolowerlongterminterest
ratestoday.Depressedlongterminterestratesthenincentivizehouseholdstosavelessand
consumemore,whilefirmsopportunitycostofinvestingislower,causingthemtoincrease
investmentspendingtoday.
Assuch,managingpolicyexpectations(forwardguidance)isacriticaltoolformonetary
policymakers,especiallygiventhecurrentconditionsintheU.S.Theorysuggeststhatunless
monetarypolicyaltersperceptionsregardingthefuturecourseofinterestrates,thenitwill
havenoeffect.Whilethiswouldreducenominallongterminterestrates,onlyifrealinterest
ratesareaffectedwillconsumptionandinvestmentrespond(LucasandPrescott(1971)).5At
thezerolowerboundinparticular,managingpolicyexpectationsthroughforwardguidancecan
provideadditionalmonetarystimulus.Byexaminingmarketreactionstocalendarbased
forwardguidanceusingfuturesratesandlongterminterestratesfrom2008through2013in
theU.S.,theU.K.andtheEurozone,FilardoandHofman(2014)showthatforwardguidance
causedafallinfuturesrates(futureinterestrateexpectations).Theusefulnessofthistool
dependsonthepublicsbeliefthatthecentralbankwillfollowthroughwithitscommitment,
andonthepolicyguidancebeingclearlyandcrediblycommunicatedinawaythatleadstothe

it=Et(t+1)+rtwhereitisthenominalinterestrate,Et(t+1)istheexpectedinflationratenextperiodandrtisthe
realinterestrate.

correctinterpretationbyhouseholdsandfirms(FilardoandHofmann(2014),pp.3840).
Similarly,afallintheliquidityanddefaultpremiumrepresentsanotherchannelformonetary
policytohaveaneffectonthemacroeconomytheFederalReservepubliclyactinglikea
buyeroflastresortleadstoanincreaseinliquidityinthemarketthroughprivateinvestors
becomingconfidentthatthemarketwouldreceivestrong,ongoingcentralbanksupport(Joyce
etal.(2011)).
Inconjunctionwiththeotherchannels,privateagentsexpectationsregardingthe
futuremaybealteredbyforwardguidance.Forexample,forwardlookinghouseholdscould
cometoexpectthatacommitmenttokeepinginterestrateslowforanextendedperiodoftime
willleadtoanimprovementinemploymentandwageoutcomes.Inturn,thiswouldleadto
higherspendingandaboostineconomicactivityinthenearterm.Theplausibilityand
quantitativeimpactofthischannelcanbeseenintheevidenceprovidedbythispaper,
particularlyinregardstotheefficacyofexpansionarymonetarypolicyexpectationsshockson
economicactivityatthezerolowerbound.
Addressingthechallengesofthecurrenteconomicenvironmentrequiresthinking
carefullyaboutthetradeoffsofunconventionalmonetarypolicy,andthepotentialuseof
interestrateexpectations(forwardguidance)asapolicytoolinandofitself.Ourpaper
contributestothisdebatebyprovidingaquantificationofthesizeanddynamiceffectson
economicactivityandinflationofexpectationsshockstofuturepolicybasedontheexperience
oftheU.S.activelypursuingforwardguidancewhileatthezerolowerbound(see,e.g.,Contessi
andLi(2013a,b)).

3. EmpiricalAnalysis:Data
WeuseinterestrateforecastsfromtheFederalReserveBankofPhiladelphiasSurveyof
ProfessionalForecasters(SPF).TheSPFsurveysasampleofbetweenfortyandfiftyprofessional
forecastersregardingrealmacroeconomicvariablessuchastheinflationrateandrealoutput
growth.TheSPFisaquarterlysurveythatdatesbackto1968;however,thevariableusedinour
analysis(forecastsofthethreemonthTreasurybillrate)wasincludedinthesurveybeginningin
1981.6SPFprovidesapanelofonequarter,twoquarter,threequarter,fourquarter,current
fiscalyear,andnextfiscalyearforecasts.Weusethelongestconsistentforecasthorizon
available(fourquarters)intheVAR,togetherwiththeinflationratebasedontheCPI,the
unemploymentrate,andtheFederalFundsrate.Figure1plotstheexpectedfourquarter
aheadforecastonthethreemonthTreasurybillandtherealizedFederalFundsrate,shifting
theexpectationsseriesfourquartersbacktoaccountforthetimedifferencearisingfromthe
forecasthorizon.Figures2and3showdensityhistogramsofthepolicyexpectationsseriesafter
segmentingitintothe1981:Q32008:Q1(nonzerolowerbound)and2008:Q22014:Q3(zero
lowerbound)subsamples.
Theothervariablesusedinouranalysistheinflationratecalculatedfromchangesin
theseasonallyadjustedCPIlevelforallurbanconsumers,theseasonallyadjustedcivilian
unemploymentrate,7theseasonallyadjustedannualizedrealGDPgrowthrate,theFederal
Fundsrate,totalnonborrowedreservesofdepositoryinstitutions,andthesizeofthe

Theinterestrateisnotsubjecttorevisions.Byusingforecastsoftheinterestrate,wedonotfacethedifficultyof
dealingwithrealtimeforecastsondatathatissubsequentlysubjecttomajorrevisions.
7
Theunemploymentrateisalsonotsubjecttorevisions.Wethereforedonothavetheissueofrealtimedatathat
issubjecttosubstantialrevisions.

10

monetarybasewerealltakenfromtheSt.LouisFederalReservedatabase.Thedataonthe
spotcrudeoilprice(WestTexasIntermediate)wastakenfromtheWallSt.Journal/Haver
Analytics,andthenominaltradeweightedvalueofthedollarseriesisfromtheFederalReserve
Board(ForeignExchangeRates,G.5).8TheShadowFederalFundsRateisfromtheFederal
ReserveBankofAtlantaCenterforQuantitativeEconomicResearch,andwasconstructedby
CynthiaWuandFanDoraXia(WuandXia(2014))tobackoutanindicatorofmonetary
accommodationthroughunconventionalmonetarypolicytoolsintermsofaFedFundsrate
unconstrainedbythezerolowerbound.Alldataistakenatquarterlyintervalsfrom1981:Q3
through2014:Q3.
WealsouseforecastsfromtheLivingstonSurveyoftheFederalReserveBankof
Philadelphiainarobustnesscheckasourpolicyexpectationsvariable,inwhichforecasters
providesixmonthsahead,twelvemonthsahead,currentfiscalyear,andnextfiscalyear
forecastsoftherateonthethreemonthTreasurybill.Tomaintainconsistencywithour
benchmarkmodelandmakeuseofthelongestpossibleforecasthorizon,weusethetwelve
monthaheadforecastfortherobustnesscheck.Thispanelofforecastsistakenatsemiannual
intervalsfrom1992:S1through2014:S2,andgivesusasignificantlyshortersamplesize.

Thesizeofthemonetarybase,crudeoilprice,andnominalexchangeratewerealltransformedintoquarter
overquarterpercentagechanges.Weadoptgrowthratesheretomaintainstationarity;however,includingthese
variablesinlevelsintheaugmentedmodelsalsoyieldedrobustresultsthatwereinlinewithourotherkeyfindings
onthepropagationofexpectationsshocks

11

4. EmpiricalAnalysis:Methodology
OurapproachusesapaneldataVectorAutoregression(VAR)methodology.Asina
traditionalVARapproach,thismethodologytreatsallthevariablesinthesystemas
endogenous;however,thepaneldataapproachalsoallowsforunobservedindividual
heterogeneitywhicharisesinourcontextacrossindividualforecasters.Ausefuldiscussionof
panelVARsandtheircorrespondingimpulseresponsefunctionscanbefoundinLoveand
Ziccino(2006).
Ourpanelvectorautoregressive(VAR)processincorporatesqvariablesasfollows,

z jt 0,t 1,t z jt 1 ... p ,t z jt p f j Qt t ,

t N 0, I n ,
z
t

(2)

wherezjtisthenzt1vectorofendogenousvariablesattimetforforecasterj,pisthenumber
oflagsinthespecification,andtisconsistentnzt1vectorofexogenousshocks.Weallowthe
dimensionofzjttopotentiallychangeovertimesolongasnztq.0,t,...,p,tandQtarethe
conformablematricescontainingtheunknownVARparameterstobeestimated.Thelikelihood
ofthemodelisinvarianttoorthonormaltransformationsofQt(thatis,thecontemporaneous
impactofshocksonobservedvariables).Weparameterizethelikelihoodfunctionintermsoft
=QtQtandestimatethisreducedformmodel.Onlyinasecondstep,weidentifyQtbasedona
Choleskydecomposition.
Weassumethattheparametersonlychangewhentheinterestratehitsorleavesthe
zerolowerbound(ZLB).Thus,wedefineforthelagsl=1,...,pthefollowingcoefficientsl,1=

12

l,t{ZLBnotbinding},l,2=l,t{ZLBbinding},l,1=l,t{ZLBnotbinding},andl,2=l,t{ZLBbinding}forourVAR
specificationin(2).ThisapproachisconceptuallyrelatedtoaTVPVAR(TimeVarying
ParameterVAR)modelwithoccasionaljumpsorapureregimeswitchingapproach.However,a
morenotabledifferenceisthatweassumetheshiftintheparametersonlyoccursasafunction
ofthestateoftheeconomywhenthemonetarypolicyisconstrainedbythezerolower
bound.InaTVPVARmodel,parameterinnovationsareinsteadtreatedasindependentofthe
observedvariablesandsubsequentlyareindependentofthepathofthepolicyrate.Wethink
theunderlyingassumptionsoftheTVPVARmodelare,therefore,lessdesirablewhenstudying
parameterchangesresultingfrompolicyreachingthezerolowerboundconstraint.Webelieve
thatourapproachismoreappropriatetocapturethepotentialdynamicshiftsthatoccurinthe
data,aseconomictheorysuggeststhatthebreakpointdependsonthestateoftheeconomy
andoughttooccurwhenevertheconstraintbecomesbinding.
InapplyingthepanelVARproceduretoourdata,weallowforindividual
heterogeneityinthelevelsofthevariablesbyintroducingfixedeffectsacrossforecasters,with
thetermfjinthespecificationin(2).Meandifferencingtoeliminatethefixedeffectscreates
biasedcoefficientsbecauseofcorrelatedregressorsinthemodelspecificationduetolagsof
thedependentvariables.WefollowtheHelmertprocedureproposedbyArellanoandBover
(1995)offorwardmeandifferencingtoeffectivelydealwiththisproblem.9TheHelmert
transformationpreservestheorthogonalitybetweentransformedvariablesandlagged

Forwardmeandifferencingremovesthemeanofallthefutureobservationsavailableforeachforecasterperiod
pair.

13

regressors,soitshouldnotaffecttheestimatesofthecoefficientsbysystemGMM,andallows
ustousethelaggedregressorsasinstrumentsintheVARspecification.
Wefocusouranalysisontheimpulseresponsefunctions,whichdescribetheresponse
ofonevariableinthesystemtoapositiveonestandarddeviationinnovationtoanother
variableinthesystem(settingallothershockstozero).Sincetheimpulseresponsefunctions
areconstructedfromtheestimatedVARcoefficients,theirstandarderrorsneedtobetaken
intoaccountinordertoconstructtheconfidenceintervalsfortheimpulseresponsefunctions.
Wereportconfidenceintervalsontheimpulseresponsefunctionsgeneratedbyusing500
MonteCarlosimulations.
SincethevariancecovariancematrixoftheerrorsQtisgenerallynotdiagonal,weneed
todecomposetheresidualssothattheybecomeorthogonal.Wethereforeadoptaparticular
orderingandimposeaCholeskidecompositionthatallocatesanycorrelationbetweenthe
residualstothevariablethatcomesfirstinthepresetordering.Thisapproachisequivalenttoa
recursiveVARspecificationthevariablesthatcomeearlierintheorderingaffectthefollowing
variablescontemporaneously,aswellaswithuptoplags.Thevariablesthatcomelateronly
affecttheonesprecedingthemwithsomelag,butnotcontemporaneously.
FollowingLeducandSill(2013),westructureourVARwitharecursiveidentification
scheme,placingtheexpectedinterestratefirst,followedbytheinflationrate,the
unemploymentrate,andfinallytheFederalFundsrate.10Thisrecursiveorderingisspecifically

10

WealsoworkedwithabenchmarkmodelusingtherealGDPgrowthrateinsteadofunemploymentasourproxy
foreconomicactivity.TheresultswhenusingrealGDPgrowthwereconsistentwiththeVARmodelstructuredwith

14

motivatedbythetimingofthesurveydata.Forecastersonlyhavepastinformationavailableto
themspecificallylastquartersinflation,unemployment,andFederalFundsratewhenthey
formexpectations.Thus,agentsforecastsaredependentsolelyonthesehistoricalvalues,
whichpermitsustoplacetheexpectationsvariableaboveallothersinthemodel.Inflationis
placednextinthemodel,asitisresponsivetocurrentnominalinterestrateexpectationsas
wellashistoricaleconomicactivityandtheFederalFundsrate.Thepolicytool,theFederal
Fundsrate,isplacedlastintheordering,asitrespondscontemporaneouslytofluctuationsin
currenteconomicconditions.
SmallscaleVARsliketheoneweconsidermaysufferfrommisspecificationdueto
omittedvariables,giventhatthespecificationmayprovetobeinsufficientatcapturingthe
complexfactorsthataffectthemacroaggregates.WeconsideralsoaugmentedVAR
specificationsthatincorporateotherimportantfeaturesoftheeconomicenvironmentandthe
monetarytransmissionmechanismnotcapturedinourbenchmark.11However,including
surveyexpectationsinthebenchmarkVARframeworkcanmitigatethisproblemtosome
extent,giventhatprofessionalforecastersandeconomicagentslikelyusearicherinformation
settomakeforecasts(apointalsoraisedinLeducandSill(2013)).Ourfindingsindicatethat
surveyexpectationsaboutfutureinterestratescontainimportantinformationaboutthepath
ofmonetarypolicynotdirectlyincorporatedinoursmallscaleVARspecificationthroughother
macrovariables.

theunemploymentrateandareavailableuponrequest.Theunemploymentratedatainourmodelhasthe
advantagethatitislesssubjecttodatarevisionsandavoidsthisissueinoureconometricanalysis.
11
Wediscusstheorderingofthevariablesforeachoneofthosevariantsofthemodellateronexplainingour
robustnesschecks.

15

Onepossibleinterpretationoftheshockstointerestrateforecaststhatwerecoverfrom
theVARisbasedonthegrowingliteratureonnewsshocksaboutfuturefundamentals(see,
e.g.,BeaudryandPortier(2006)).Itisalsoconnectedtotherecentliteratureonforward
guidancethatexplorestheideaofnewsshocksaboutfuturemonetarypolicy(see,e.g.,Del
Negroetal.(2013)).TotheextentthattheVARcanaccountforallthefactorsthatdrive
interestrateforecasts,aninnovationtotheexpectations(forecasts)aboutfuturemonetary
policywouldrepresentanautonomouschangeinexpectationsaboutfuturemonetarypolicy,
andcanbeinterpretedasnewsaboutfuturemonetarypolicy.TheproposedVARmethodology,
however,cannotidentifynewsshocks.OurresultsasthoseofLeducandSill(2013)show
thatexpectationscontainadditionalinformationthatisusefultoaccountfortheobserved
behaviorofmacroeconomicvariablesandtheirinteractionwithmonetarypolicy.Our
interpretationoftheinnovationstomonetarypolicyforecastsisthattheyreflect
upwards/downwardrevisionstoexpectationsoffuturemonetarypolicy.Hence,innovationsto
monetarypolicyexpectationsincorporateinformationaboutthefuturepathofpolicy(news),
butalsochangesincurrentfundamentalsthatarenotalreadyfullyreflectedinthemodel.

5. EmpiricalAnalysis:Findings
ToperformtheVARanalysisspecificallyonpaneldata,weutilizetheuserwrittenStata
programpvar.ado,writtenandmadeavailabletothepublicbyInessaLove(seeLoveand
Ziccino(2006)).12Althoughwetriedseveraldifferentlagorderselectionlengths,thefirstlag

12

ThecodesofLoveandZiccino(2006)thatweuseimplementthepanelVARmethodologyofHoltzetal.(1988).

16

continuedtobetheonlysignificantregressoracrossallvariables,sothebenchmarkand
augmentedmodelswererunusingafirstorderlag(p=1)specification.13
Thegeneralmodelin(2)allowsforbreaksinthecoefficientsastheeconomyhitsthe
zerolowerbound.Inprinciple,thismoregeneralmodelallowsforthepossibilitythatthe
coefficientswillbeexactlythesameinbothperiods,soweformallyanalyzethisstabilityissue
usingaChowtesttoletthedatagiveanansweronwhetherthemodeldynamicstrulychange
acrossthesetwoperiods.Giventheknownbreakpointinthedata2008:Q2,whenratesare
expectedtobeconstrainedatzerowithinthenextyear14wecalculatetheChowtestF
statisticusingresidualsfromapooledmodelthatincludestheentiredatasetandresiduals
fromthesplitsamplemodels.WelimitthedegreesoffreedomusedintheChowtestand
pooledmodeltoareasonablenumberbytheorizingthatthekeystructuralshiftresults
primarilyfromchangesinthetransmissionofmonetarypolicy(theFederalFundsrate)and
monetarypolicyexpectations(theSPFforecasts)shocks.Applyingthesecriteria,wefindstrong
evidenceforastructuralshiftatthezerolowerbound,withanFstatisticof34.08thatrejects
thenullhypothesisofparameterstabilityatthe99%confidencelevel(pvalueof<0.001).The

13

Thenonzerolowerboundsample(1981:Q32008:Q1)minimizedHansensJstatisticwithafirstorderlag
correspondingtoacoefficientofdeterminationof0.999669(Jstatisticof1.04e28).Thezerolowerboundsample
(2008:Q22014:Q3)minimizedHansensJstatisticwithafirstorderlagcorrespondingtoacoefficientof
determinationof0.999457(Jstatisticof1.26e28).Furtherdetailsonthelagselectionresultsareavailableupon
requestfromtheauthors.
14
Infact,theFedFundsratestillwentdownabitafter2008:Q1untilitbecamestuckatthezerolowerbound.We
splitoursampleafter2008:Q1fortworeasons:(a)policyrateswerealreadynearthezerolowerboundand
quicklymovingtowardsit;and(b)giventheworseningeconomicconditions(atthebeginningoftherecession)and
theexpectedmonetarypolicyresponsebasedonthehistoricalexperiencesincethe1980s,policymakers,
consumersandinvestorsalreadywereanticipatingthatdegreeofmonetaryaccommodationrequiredtodealwith
thecrisisovertheupcomingyearscouldnotbeaccommodatedwithconventionalpoliciesthatis,withfurther
anddeepercutsoftheFedFundsrateandmayrequireunconventionalpolicytools(includingforwardguidance)
instead.Itisprimarilyduetothefactthatalmostsincetheonsetoftherecessionprivateagentsandpolicymarkers
alikeincorporatedintotheirexpectationstheprospectthatpolicyrateswillbecomeconstrainedatthezerolower
boundinthenearfuturethatwechoosetosplitthesamplearound2008:Q1(fourquartersaheadoftheactual
pointintimeatwhichtheFedFundsrateeffectivelyhitthezerolowerbound).

17

resultsconfirmthestrikingreversalwefindinthefollowingImpulseResponsefunctionsto
ultimatelyshowthattherehasbeenasignificantregimeswitchinthebenchmarkmodelatthe
zerolowerbound.Withthisevidence,weproceedwithourestimationstrategythattreatsthe
tworegimeszerolowerboundandnonzerolowerboundasseparate.
Giventheuniqueeconomicconditionsofthezerolowerboundsample,weconsiderthe
FederalFundsrateandotherpricebasedmeasuresofthestanceofmonetarypolicyin
specification.PriortotheGreatRecession,theFederalReservesprimarytoolforachievingits
objectiveshadbeentheshortterminterestrate(Mishkin(2007)).However,thispricebased
frameworkfortheconductofmonetarypolicycanandhasbecomeconstrainedatthezero
lowerbound.Blinder(2000)identifiesarangeofunconventionalpoliciesthatthecentralbank
canstilldeploywhenpolicyratesarefixedatzero.BernankeandReinhart(2004)narrowthese
downtothetwomostplausibleunconventionaltools:(a)policieswhichshapeexpectationsof
futureinterestrates(forwardguidance),and(b)policiesthatexpandthesize(quantitative
easing)orshiftthecompositionofthecentralbanksbalancesheet(crediteasing).Whilethe
effectiveFederalFundsratemovesmuchduringthisperiod,ourbenchmarkidentificationof
monetarypolicynaturallyincorporatestheformertypeofunconventionalpoliciesexplicitly
intothemodelbyincludingboththeshorttermpolicyrateaswellasexpectationsoffuture
policy.
ApartfromtheeffectiveFederalFundsrate,weinvestigatetwoalternativepricebased
measuresofthestanceofmonetarypolicy15First,welookattheShadowRateofWuandXia

15

SeeFigures7b,7c,and7dinAppendixforselectkeyImpulseResponseFunctionsofthebenchmarkmodel
augmentedwithdifferentmeasuresofpricebasedmonetarypolicy.

18

(2014)whichusesfinancialdatatotranslatetheeffectsofthebroadrangeofunconventional
monetarypoliciespursuedbytheFederalReserveintoequivalentchangesofashadowFederal
Fundsrateunconstrainedbythezerolowerbound.Then,wealsoworkwiththeslopeofthe
yieldcurve,measuredasthespreadbetweenthelongandshortterminterestrates,which
indicatesmarketexpectationsofincreasing(decreasing)futurepolicyratesunderthe
expectationshypothesisofthetermstructure(asshowninequation(1)).However,theyield
curvealsoincorporatesatimevaryingtermandriskpremiumcomponentthatcanmakeit
difficulttodisentangletheexpectedpathofmonetarypolicy.Nonetheless,bothpricebased
measuresconfirmourkeyresultsontheimportanceofpolicyexpectations,particularlyatthe
zerolowerbound.
Giventhatallofthesecompetingpricebasedmeasuresofthestanceofmonetary
policyatthezerolowerboundhavetheirowndisadvantagesandthatourresultsontheeffects
ofpolicyexpectationsshocksremainrobustacrossthevariousmeasures,weretaintheFederal
Fundsrateinthespecificationofourbenchmarkmodel.Webelievethatinthiswayourfindings
arelesslikelytobecontaminatedbyotherfactors(riskpremia,liquiditypremia,etc.)
associatedwiththesealternativepricebasedmeasured.Inaddition,followingonBernankeand
Reinhart(2004)sclassificationofunconventionalpolicytools,wealsoincorporatequantity
basedmeasuresofthestanceofmonetarypolicyinlatervariantsofthebenchmarkmodel
augmentedwithmonetaryaggregatestoexplicitlyaccountfortheroleofquantitativeeasingin
settingthetoneoftheU.S.monetarypolicyaftertheGreatRecession.16Onceagain,weshow

16

Theeffectsofaddingquantitybasedmeasuresofmonetarypolicyarediscussedextensivelyinlatersections;see
Figures11a,11b,11cand11d,aswellasFigures12a,12band12c.

19

thatourfindingsontheroleofexpectationsaboutfuturemonetarypolicyarerobusttoa
modellingspecificationformonetarypolicythatdistinguishesbetweenpricebasedand
quantitymeasures.
I.

BenchmarkPanelVARModel:Results

Wesplitthedataintononzerolowerbound(1981:Q32008:Q1)andzerolowerbound
(2008:Q22014:Q3)periodsandestimatethemodeloverthetwosplitsamplesusingthe
recursiveorderingdiscussedpreviously.Thebenchmarkmodelandcorrespondingvariance
decompositionandImpulseResponsefunctionsyieldseveralsignificantinsights.Wefindthat
interestrateexpectationsexplainmoreofthefluctuationsinunemploymentandinflationthan
theactualFederalFundsratedoes,atboththezerolowerboundaswellasthenonzerolower
bound(seeFigure6).Thepercentageofvariationintheunemploymentrateexplainedby
interestrateexpectations1yearaheadis7.61%atthezerolowerbound,downfrom11.83%
duringthenonzerolowerboundperiod.Similarly,thepercentageofvariationintheinflation
rateexplainedbypolicyexpectationsatthezerolowerboundgrowsto23.87%1yearahead
from2.79%duringthenonzerolowerboundperiod.Theroleofpolicyexpectationsisof
particularimportanceinexplaininglongtermfluctuationsineconomicactivity.Theshareofthe
variabilityofunemploymentexplained5yearsaheadisquitelargerthan1yearaheadinfact,
theamountoffluctuations5yearsaheadexplainedbypolicyexpectationsgrowsfrom7.37%
duringnormalmonetarypolicytimesto34.2%atthezerolowerbound.Thecontributionto
thevariabilityofinflation5yearsaheadat24%remainssignificantlyhigherthanthe3.56%
awayfromthezerolowerbound,butsimilartotheshareofvariabilityexplained1yearahead.

20

ThemoststrikingresultscomefromananalysisoftheImpulseResponsefunctions(see
Figure7).Wheninterestratesarenotboundbyzero,apositiveonestandarddeviationshock
tointerestrateexpectationsleadstoadecreaseintheunemploymentrate,whileasimilar
shocktotheFederalFundsratecausestheoppositethoughlaggedreactionineconomic
activity:anincreaseintheunemploymentrateofalargermagnitudebutopposingdirection.
Wetheorizethatthecounterintuitivereactionoftheunemploymentratetopolicyexpectations
shocksawayfromthezerolowerboundcouldbeduetoasignalingeffectfromthelevelofthe
interestrate.Inotherwords,duringnormalmonetarypolicytimes,ifthereisanegative
shocktofutureexpectedinterestrates(adownwardrevisiontothepolicypath),insteadof
seeingthisasanincentivetoengageinmorespendingtoday,economicagentsareconcerned
thatlowerfutureinterestratesarearesultoftheFedengaginginunexpectedfuturemonetary
accommodation,reflectingaworseningoftheFedsownviewsaboutfutureeconomic
conditions.Soratherthanprovideastimulusboosttotheeconomytoday,firmsand
householdspostponeprojectsandconsumerspending,fearfuloffuturedepresseddemandand
economicactivity.
However,atthezerolowerbound,thesignalingmechanismworksquitedifferently.The
zerolowerboundisonlyaconstraintformonetarypolicyifeconomicconditionswarranta
furtheraccommodationtoday.Therefore,ifthereisanupwardrevisiontofuturemonetary
policywhileatthezerolowerbound,itcanonlymeanthateconomicconditionsareimproving
more(orfaster)thanexpected,whichwouldthenjustifywhyfuturemonetarypolicyisnow
expectedtotighten.Inthatcase,economicagentshaveanincentivetopostponeinvestment
andconsumptiondecisionsbecauseshorttermratesareunchangedbutlongtermratesare
21

risingduetothetermstructureofinterestrates.17Thismeansthatexpectationsshocksatthe
zerolowerboundbehavealmostasshockstothepolicyrateitselfinnormalmonetarypolicy
times.Weevenfindthereactionoftheunemploymentratetoapolicyexpectationsshockat
thezerolowerboundisofasimilarmagnitudetothecorrespondingreactionfromashockto
theFederalFundsrateduringnormalmonetarypolicytimes,althoughitislagged,becoming
significantinthedataonlyafter2quarters.
Thefactthatinterestratesareconstraineddownwardsatthezerolowerbound
suggeststhatthetransmissionofothershocksalsochangesastheirinteractionwithmonetary
policythroughthepolicyratebecomesconstrained.Forexample,awayfromthezerolower
bound,apositiveunemploymentrateshockleadstoalowerFederalFundsratetodayandan
expectationoflowerinterestratesinthefuture.Thishelpstomitigatetheimpactoneconomic
activity,butleadstotemporarilylowerinflationwhileunemploymentremainselevated.Atthe
zerolowerbound,apositiveunemploymentrateshockleadstoamodestdeclineintheFederal
Fundsrate,butanexpectationofhigherfutureinterestrates.This,inturn,resultsinasmall
positiveincreaseininflation.Giventhatthepolicytoolitselfcannotgomuchloweronimpact
duringthisperiodofnearzerorates,theresponseofmonetarypolicyexpectationsbecomes
evenmorerelevant.

17

Wemorecloselyexaminetheimpactofexpectationsshocksonfartheroutontheyieldcurveinalatersection,
seeFigures12a,12b,and12c.

22

II.

AugmentedPanelVARModels:Results

Tothoroughlyanalyzetheeffectofmonetarypolicyexpectationsshocksonthe
economy,weextendourbenchmarkmodeltocontrolforseveralvariablesthatcouldbe
influencingourresultstheexchangeratechannelofmonetarypolicy(usingthenominal
exchangerate),effectsofglobaleconomicdevelopments(shockstooilprices),themonetary
policytransmissionmechanism(longterminterestrates),unconventionalmonetarypolicy
duringthe2008financialcrisis(proxiedbythesizeofthemonetarybaseandtheShadow
FederalFundsrate)aswellasutilizetheLivingstonSurveyasafurtherrobustnesscheck.
TheExchangeRateChannelofMonetaryPolicy
Theeffectofmonetarypolicyoneconomicactivitywithopencapitalmarketsthrough
theexchangerateiswelldocumentedandrepresentsanothermajorchannelforthe
transmissionofmonetarypolicy(Bernankeetal.(2004)).Intheshortrunandwithpricesslow
toadjust,anominalexchangeratedepreciationequatestoarealdepreciation,andthereforea
shortrunimprovementinnetexports(Krugman(2000)).Thenominaldepreciationpotentially
inducedbypolicywouldthereforestimulateeconomicactivity,atleastintheshortterm.
Tofirstidentifytheexchangeratechannelinouraugmentedmodel,weincludethe
nominalexchangerate,placingitimmediatelyfollowingtheFederalFundsrate,sothatchanges
todomesticfuturemonetarypolicyexpectations,currentinflation,andtheactualpolicytoolall
drivefluctuationsintheexchangerate.Figures8aand8bshowtheImpulseResponsesofthe
unemploymentrateandnominalexchangeratetoaninnovationintheexpectedinterestrate
Comparingthesetoourbenchmarkmodel,wefindthatincludingtheexchangeratedoesnot
23

changeourconclusionsontheunderlyingstructuralshiftinthedynamicresponsetomonetary
policyexpectationsshocksthatoccuratthezerolowerbound.
OurresultsareconsistentwithEichenbaumandEvans(1995)inthatfollowingapolicy
rateshockduringnormalpolicytimes,theexchangeratemodestlyappreciatesanditdoesso
overaprolongedperiodoftime.18Atthezerolowerbound,however,theU.S.dollar
depreciatesinresponsetoacontractionarypolicyshock(seeFigure8c).Weinterpretthisas
evidencethatinnormaleconomictimes,theexchangeratechannelamplifiestraditional
monetarypolicyacontractionaryshockleadstoanappreciationofthedomesticcurrency,
andacorrespondingdecreaseinexports,furtherdepressingeconomicactivity.However,atthe
zerolowerbound,thereisareversalinthebehavioroftheexchangeratechannel,asa
contractionarymonetarypolicyshockisdampenedbyasignificantdepreciationintheU.S.
dollar.Meanwhile,shockstomonetarypolicyexpectationshavestrongereffectsonthe
exchangerateduringnormalpolicytimes,goinginthesamedirectionasshockstothe
FederalFundsrate(seeFigure8aandFigure8c),althoughthedampeningeffectthatthismay
haveontheforeignsectordoesnotpreventeconomicactivityfromrisingatthesametime(see
Figure8b).Atthezerolowerbound,unemploymentincreasesbuttheeffectsofpositiveshocks
tomonetarypolicyexpectationsontheU.S.dollararelargelymuted(seeFigure8a),asthey
becomestatisticallyinsignificant.

18

EichenbaumandEvans(1995)provideevidenceofsystematicdeviationsfromtheuncoveredinterestrateparity
(UIP)condition.UIPinitssimplestformsuggeststhattheexpectedfuturechangeintheexchangerateequalsthe
differencebetweendomesticandforeignnominalinterestrates.

24

GlobalEconomicDevelopments:OilShocks
Weincorporateglobaldevelopmentsthatmayhavenotbeenproperlyreflectedinthe
benchmarkmodelbutmaybeimportantfortheperceptionsofeconomicagentsandpolicy
makersintheU.S.Oilispricedinglobalmarketsandthereforepicksuptheseinternational
developments,soweexogenizeoilpricesinthemodel.Oilisplacedlastintheordering,sothat
itcontemporaneouslyaffectsallothervariables,butisonlyinfluencedbylaggedvaluesofthe
otherpolicy,expectationsandmacrovariables.Wehighlighttwoimportantfindingsfirst,that
evenafteraddinginthisproxyforglobaleconomicdevelopments,expectationsbehave
similarlytothepreviousfindingsinourbenchmarkmodel,bothatthezerolowerboundaswell
asduringnormalmonetarypolicytimes(seeFigure9a).Second,byaddinginoilpricestothe
modelspecification,wesuccessfullymitigatethepricepuzzlethatarisesinthebenchmark
model.19Inotherwords,weseeinFigure7thatinthebenchmarkmodel,apositivemonetary
policyshockgeneratesasignificantuptickininflationratherthanadecline,asonewould
expectfrommostconventionalmonetarymodels.Addinginoilpricessignificantlydampensthis
effectinnormaleconomictimesandcompletelyreversesitatthezerolowerbound(see
Figure9b),whilepreservingthemainfindingsaboutmonetarypolicyexpectationsobtained
withthebenchmarkmodel.

19

Sims(1992)wasamongthefirsttoproposetheintroductionofcommoditypricestoresolvethepricepuzzle.
Sims(1992)andGiordani(2004)arguethatthepricepuzzlemaysimplyarisebecausepolicyrateinnovations
partiallyreflectunmodelledinflationarypressuresthatleadtopriceincreasesand,inthatsense,oilpricesinthe
VARappeartocaptureenoughadditionalinformationaboutthoseinflationarypressuresthatitmayresolvethe
pricepuzzle.

25

TheTransmissionMechanismofMonetaryPolicy:LongTermInterestRates
Tofurtherexaminetheroleofinterestrateexpectationsoneconomicactivity,wealso
considerotherimportantaspectsofthetransmissionmechanismofmonetarypolicy:longterm
interestrates.WeincludetheyieldonthetenyearU.S.Treasurybillinourbenchmarkmodel,
placingitdirectlyaftertheunemploymentrateandimmediatelypriortotheFederalFunds
rate.Thisismotivatedbytheexpectationschannelofmonetarypolicydiscussedpreviouslya
changetotheFederalFundsratenotonlyaffectsinvestmentandconsumptiondecisions
directlythroughchangestoshorttermrates,butbyalsoloweringexpectationsoffutureshort
termratesand,therefore,longtermyieldswhichincorporatetheselowercurrentandfuture
shorttermrates.Thus,longtermratesrespondcontemporaneouslytoshockstotheFederal
Fundsrate,whileeconomicactivity(theunemploymentrate)isdeterminedinpartbylagged
valuesofboththeshorttermandlongterminterestrates.TheresultsfromourImpulse
Responsefunctionsconfirmthistheory,withintriguingshiftshappeningatthezerolower
bound(seeFigures10a,10band10c).Apositiveshocktoshortterminterestrateexpectations
leadstoanincreaseintheyieldonthetenyearU.S.Treasuryatboththenonzerolowerbound
aswellasatthezerolowerbound.Wealsofindthatashocktolongtermratesaloneisnot
enoughtocauseastatisticallysignificantchangeineconomicactivitywhentheFederalFunds
rateisatnormallevels;however,whenthepolicytoolbecomesboundbyzero,ashockto
longtermrateshasasubstantialeffectontodaysunemploymentrate.Echoingthisisthe
reactiontoinnovationsinshorttermrateexpectationsbytheunemploymentrateagain,we
findthatatthezerolowerboundapositiveshocktoexpectationsdrivesasignificantincrease

26

inunemployment,thereverseofthereactioninnormalconditionswhenmonetarypolicyis
unconstrained.
Thesefindingshaveinterestingimplicationsinregardstothebehavioroftheyield
curve.Innormaleconomictimes,aswellasatthezerolowerbound,apositiveshockto
expectationsofshorttermratesleadstoanincreaseintherateonthetenyearU.S.Treasury
(seeFigures10a,10band10c).Thesamepositiveshocktoexpectationsalsoincreasestodays
shorttermrates(albeitmuchmoremodestlyatthezerolowerbound).However,adownward
revisionofexpectedfutureshorttermratescanhaveasignificantlydifferentimpactonthe
shapeoftheyieldcurvewhentheeconomyisatthezerolowerboundlongtermrateswould
beadjustedsomewhatdownward,whileshorttermratesremainfixedatzero,unableto
respondmuchfurthertothenegativeinnovationtoexpectations,movingtheslopeoftheyield
curveinadownwardsdirectionandstimulatingeconomicactivitytoday.Awayfromthezero
lowerbound,innovationstoexpectationsoffuturemonetarypolicyareabletoimmediatelybe
incorporatedintobothshorttermandlongtermrates,andthereforedonotnecessarilylower
theslopeoftheyieldcurveitself,ordoessobyalessermagnitudethanitdoeswhenshort
termratesareboundedbyzero.
Thisfurtherillustratesthestrengthofthetransmissionmechanismofmonetarypolicy
expectationsinaneconomyatthezerolowerbound:changesinexpectedfutureshortterm
ratesaffectlongtermratesaswellassignificantlyimpacttheslopeoftheyieldcurve,
stimulatinginvestmentdecisionsandeconomicactivitytoday.Decliningyieldcurvestendtobe
associatedwithrecessionsinnormalpolicyperiods,astheyareindicativeoflowered

27

expectationsonthefutureprospectsoftheeconomy(thus,requiringmoreexpansivemonetary
policiesforsupportedthananticipated).Atthezerolowerbound,thisloweringintheslopeof
theyieldcurvesignalsthatthecentralbankiswillingtoprovidedmoremonetary
accommodationthanwasexpectedovertime.Giventhatcurrentpolicyratesarestuckatzero,
thedeclineinlongtermratesthatfollowsfromincorporatingthoserevisedexpectationshelps
boosttheeconomytoday,asprivatehouseholdsandfirmsanticipatetheirconsumptionand
investmentdecisionsinresponsetothedeclininglongtermrates.Giventhesignificantrole
thattheseinnovationstopolicyexpectationshaveonoutput(seeFigure10b),theymayalso
playanimportantpartinbringingtheeconomybackonitspath.Furthermore,ourresults
suggestthatatthezerolowerbound,theslopeoftheyieldcurvemaybelessaccurateasan
indicatorofthelikelihoodofarecessionthanithadtraditionallybeenbefore(see,e.g.,
RudebuschandWilliams(2009)).
QuantitativeEasingattheZeroLowerBound
GiventheextraordinaryactionsoftheFederalReserveinexpandingthesizeofthe
monetarybaseduringthe2008financialcrisisthroughassetpurchaseprogramsandother
relatedinitiativesaimedatexpandingtheFedsbalancesheet,weaddtheSt.LouisAdjusted
MonetaryBaseasanexogenousvariabletocontrolforthispotentialconfound.Figures11aand
11bshowtheImpulseResponsefunctionstoaninnovationintheexpectedinterestrateinthe
augmentedVARmodel.Wemaintainthesamerecursiveorderingasinthebenchmarkbutadd
themonetarypolicylast,asanexogenousvariable.Comparingthesetotheresultsfromthe
benchmarkmodel,wefindnosignificantchangeinthereactionofeconomicactivitytopolicy

28

expectationsshocks,nortothesignificantreversalofbehavioratthezerolowerbound.
However,wefindthattheincreaseintheunemploymentratefollowingapositiveupward
revisionontheexpectationsoffuturemonetarypolicyaccruesfaster,turningpositive
immediatelyaftertheshock(unlikeinthebenchmarkmodel).
ThisaugmentedVARalsoallowsustoexaminetheefficacyofquantitativeeasing
proxiedbyexpansionsofthemonetarybaseoneconomicactivityatthezerolowerbound
andhowitsmacroeffectscomparetothoseofshockstointerestrateexpectations.During
normalpolicytimes,apositivechangetothegrowthofthemonetarybasehasastatistically
insignificanteffectoninflation,butcausesasubstantialdecreaseintheunemploymentrate
(seeFigures11cand11d).Ontheotherhand,atthezerolowerbound,thesesameshocksto
thegrowthofthemonetarybaseleadtomodestincreasesinbothinflationandthe
unemploymentrate.Althoughstatisticallysignificant,theeffectsofashocktothegrowthrate
ofthemonetarybasearerathersmall.Inparticular,theimpactofashocktothegrowthrateof
themonetarybaseonunemploymentisapproximatelytwiceaslargeasthatofapolicyrate
shockatthezerolowerbound.However,ourfindingsalsoshowthattheeffectof
unemploymenttoshockstoexpectationsoffuturepolicyisalotlargerthanthecombined
effectsofbothshockstothepolicyrateandtothegrowthrateonthemonetarybase.The
quantitativeimportanceoftheseexpectationsshocksrelativetootherpolicyrelatedshocksis
thekeytakeawaythatwewouldliketohighlight.Wearguethattheseresultsalsoshowcase
theimportanceandefficacyofmanagingexpectationsaboutfuturepolicy(forwardguidance)
atthezerolowerbound.

29

Wealsoconfirmourfindingsonthedynamicresponsestoexpectationshocksbynext
substitutinginthetotalnonborrowedreservesofdepositoryinstitutionsforthemonetary
base.Itremainsthecasethatapositiveshocktointerestrateexpectationsleadstoa
substantialincreaseintheunemploymentrateatthezerolowerbound(seeFigure12a).
Inthisaugmentedmodel,apositiveshocktononborrowedreservesatthezerolower
boundcausesadecreaseintheunemploymentratethatbecomesinsignificantafterfour
quarters,whileapositiveshocktotheFederalFundsrateiscontractionaryandyieldsan
increaseintheunemploymentrate(seeFigures12band12c).Thisprovidesevidencethatat
thezerolowerbound,ifweaccountfortheunprecedentedquantitybasedmonetarypolicies
undertakenbytheFederalReservebywayofnonborrowedreserves,thestimulatingeffectson
economicactivityofsuchunconventionalpoliciesappearsmallsmallerthanshocksto
expectedfuturemonetarypolicyatthezerolowerbound(seeFigure12aand12c)andshort
livedcomparedtoanexpansionary(negative)shocktoexpectedfuturemonetarypolicy(see
Figure12a).Thissuggeststhatcredibleandwellcommunicatedforwardguidancecanbe
amongstthemosteffectivetoolsthatthecentralbankcandeploywhenconventionalpolicy
becomesconstrainedatthezerolowerbound.
AlternativeSurveyBasedForecasts:TheLivingstonSurvey
Wecompleteourrobustnesschecksoftheempiricalmodelbyutilizingadifferent
measureofpolicyexpectations,theLivingstonSurvey.Whilemaintainingthesamerecursive
orderingandsplitsampleasinthebenchmarkmodel,wereplacetheSPFpolicyexpectations
termwiththeequivalentfromtheLivingstonSurveyandsubstitutethequarterlydatafor
30

semesterdatausinganaveragingaggregationmethod.TheresultsareshowninFigure13,and
arevirtuallythesameasthosefoundwhenusingtheSPFdata.Consequently,weconcludethat
expectationsofmonetarypolicyarenotonlyanimportantdriverofcurrentmacroeconomic
variables,butthebehaviorofeconomicagentsundergoesasignificantandquantitatively
importantchangewheninterestrateshitthezerolowerbound.

6. ConcludingRemarks
Theintriguingshiftinthedynamicresponsestopolicyshocksandshocksto
expectationsaboutfuturemonetarypolicyshowsthatthetransmissionmechanismof
monetarypolicychangeswheninterestratesedgetowardthezerolowerbound.Inthispaper
weempiricallyinvestigatethetransmissionmechanismofmonetarypolicyandexpectations
withasmallscaleVARmodelthatbuildsontheapproachofLeducandSill(2013)toassess
expectationsdrivenbusinesscycles.Wefindthatfutureshortterminterestrateexpectations
becomeahighlysignificantdriverofvariabilityineconomicactivityandinflation,asthepolicy
expectationsbecomeincorporatedintolongterminterestrates.Asthepolicyratesbecome
stuckatthezerolowerbound,thebehaviorofthemonetarytransmissionmechanismitself
changesshockstoexpectationsthemselves,ratherthanthepolicytool,arewhatinfluence
economicactivity(andinflation).Inthisregard,wefindstrongevidencethatdownward
revisionstoexpectedfuturemonetarypolicyoneyearaheadcanhavelaggedbutlargeeffects
oneconomicactivitywhenpolicyratesapproachzero.

31

Hence,evenatthezerolowerbound,thecentralbankcanstilluseforwardguidanceto
provideadditionalstimulus.Althoughshockstomonetarypolicyexpectationswereshownto
havelimitedeffectsduringnormalpolicytimes,theimportanceanddynamiceffectsofthese
shockschangessignificantlyatthezerolowerbound.Inthatregard,policyexpectationsand
forwardguidancebecomecrucialtoolsforstimulatingtheeconomy.Managingpolicy
expectationsprovidesasignificantopportunityforpotentiallyguidinganeconomywhen
conventionalmonetarypolicyisnolongerarealisticoption.

32

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36

Appendix
FRBofPhiladelphiasSurveyofProfessionalForecasters:
tbill6isthefourquarteraheadnominalinterestrateforecastonthethreemonth
Treasurybill.Samples4050forecasters,between1981:Q3and2014:Q3,ataquarterly
frequency.
St.LouisFederalReservesFREDdatabase:
Inflationrate(CPI),unemploymentrate,FederalFundsrate,oilprice,monetarybase,
nonborrowedreserves,10YearTreasuryBill.unrateisthecivilianunemployment
rate;inflationistheinflationratecalculatedfromCPI;ffristheFederalFundsrate;
bogmbaseistheSt.LouisAdjustedMonetaryBase;tenyeartreasuryistheyieldon
the10YearU.S.TreasuryBill;nbristhenonborrowedreservesofdepository
institutions;slopeistheslopeoftheyieldcurvecalculatedbytheauthors
WallSt.Journal/HaverAnalytics:
oilpriceiscrudeoilpriceperbarrel,WestTexasIntermediate
FederalReserveBoardofGovernors:
nomxchangeisthenominaltradeweightedvalueofU.S.dollar
(https://research.stlouisfed.org/fred2/series/TWEXBMTH)
FederalReserveBankofAtlanta:
shadowrateistheshadowFederalFundsrate(WuandXia(2014))
37

FRBofPhiladelphiasLivingstonSurvey:
tbill6isthefourquarteraheadnominalinterestrateforecastonthethreemonth
Treasurybill.BetweenJune1992andDecember2014,atsemiannualfrequency.
ControlforindividualfixedeffectswithHelmerttransformation:
Forwardmeandifferencingremovesmeanofallfutureobservationsforeachindividual
forecasterstimepair.Giveslargerweighttoobservationsclosertothebeginningofthe
series(andassumesobservationshaveequalvariances).

z Hjt

T t
T t 1

38

T1t z t 1 z jz .
T

jt

(3)

Label
ie1t+4t(j)
ie1t+4t(k)

i10year
t
M0t
Ot
ut
it
et

NBRt
spreadt
ist

Table1Data
Description
Source
Comments
Expectedshorttermrate SPF
Forecasts4quartersaheadofthe3month
Tbill(annualizedrates,%)forasampleof
4050forecasterseachquarter
Expectedshorttermrate FRB.P
Forecasts4quartersaheadofthe3month
Tbill(annualizedrates,%)forasampleof
around50forecasterseachsemester
10YearTreasuryBill
FRED
YieldontheU.S.10YearTreasuryBill
(annualizedrate,%)
InflationRate(CPI)
FRED
Seasonallyadjusted,quarteroverquarter
(%)
MonetaryBase
FRED
St.LouisFedAdjustedMonetaryBase,
quarteroverquarter(%)
OilPrice
WSJ
Spotcrudeoilprice:WestTexas
Intermediate,quarteroverquarter(%)
UnemploymentRate
FRED
Seasonallyadjusted(%)
FedFundsRate
FRED
Annualizedrate(%)
BroadNominalTrade
FRB
Againstthe36majortradingpartnersof
WeightedValueofthe
theU.S.,quarteroverquarter(%)
Dollar
NonBorrowedReserves
FRED
Nonborrowedreservesofdepository
institutions,quarteroverquarter(%)
YieldCurveSlope
FRED
Shorttermrate(FFR)subtractedfrom
yieldon10YearTreasuryBill
ShadowFederalFunds
FRB.A
WuandXia(2014)(annualizedrate,%)
rate

Note:Alldatacalculatedbytheauthorsareavailableuponrequest.Thisdataorasubsetisincludedinthevector
ofvariableszjt.TheacronymSPFstandsfortheSurveyofProfessionalForecasters;WSJstandsforWallSt.Journal/
HaverAnalytics;FREDstandsforFederalReserveEconomicDataoftheFederalReserveBankofSt.Louis;FRB
standsforFederalReserveBoard;FRB.PstandsforFederalReserveBankofPhiladelphia,LivingstonSurvey;FRB.A
standsforFederalReserveBankofAtlanta.
Note:The(broad)nominaltradeweightedvalueofthedollarisaweightedaverageoftheforeignexchangevalue
oftheU.S.dollaragainstthecurrenciesofabroadgroupofmajorU.S.tradingpartners.Anincreaseinthetrade
valueofthedollarisinterpretedasanappreciationoftheU.S.dollar.

39

Data:19812014

Figure1:Expectedinterestrateon3monthTreasuryandactualFederalFundsrate,time
adjustedfor4quarterlagonexpectationsvariable

40

Figure2:Distributionofexpectednominalrateon3monthTreasury(1981:Q32008:Q1)

Figure3:Distributionofexpectednominalrateon3monthTreasury(2008:Q22014:Q3)
41

BenchmarkModel

Coefficient
Interest rate expectations (tbill6)
L.tbill6
L.inflation
L.un_rate
L.FFR

Standard Error

t-statistic

0.030284
0.048585
0.018182
0.024900

22.529973
0.691113
-2.107228
4.734563

0.001636
0.069937
-0.047319
0.032041

0.011487
0.023331
0.009513
0.009808

0.142451
2.997641
-4.974212
3.266844

-0.014650
0.075282
0.978693
0.039644

0.010012
0.014529
0.007234
0.007563

-1.463232
5.181543
135.293080
5.241570

0.028843
0.046277
0.014215
0.025240
GMM

7.672243
-4.000550
-8.847077
29.247078

0.682309

0.033578
-0.038315

0.117888

Inflation rate

L.tbill6
L.inflation
L.un_rate
L.FFR

Unemployment rate

L.tbill6
L.inflation
L.un_rate
L.FFR

Federal Funds rate

L.tbill6
L.inflation
L.un_rate
L.FFR

0.221293

-0.185133

-0.125762
0.738186

Results of the estimation by system

Figure4:PanelVARmodeloutput(1981:Q32008:Q1)

42

Coefficient
Interest rate expectations (tbill6)
L.tbill6
L.inflation
L.un_rate
L.FFR
Inflation rate
L.tbill6
L.inflation
L.un_rate
L.FFR
Unemployment rate
L.tbill6
L.inflation
L.un_rate
L.FFR
Federal Funds rate
L.tbill6
L.inflation
L.un_rate
L.FFR

Standard Error

t-statistic

0.061456
0.020138
0.009936
0.084338

9.927512
2.941328
5.767405
1.856385

0.071918
0.021842
0.014533
0.155041

-3.266495
11.484348
4.820496
-1.417642

0.025581
0.012341
0.008775
0.035937

3.690546
-30.309197
113.551220
14.852605

0.024023
0.008017
0.003551
0.052446
GMM

-2.158226
2.268329
1.969846
12.400257

0.610101

0.059232
0.057302

0.156564

-0.234919
0.250847

0.070058

-0.219793

0.094407

-0.374041

0.996458
0.533765

-0.051846

0.018186
0.006995

0.650349

Results of the estimation by system

Figure5:PanelVARmodeloutput(2008:Q22014:Q3)

43

Parameter

Period

Interest rate expectations (tbill6)

Inflation rate

Unemployment rate

Federal Funds rate

Interest rate expectations (tbill6) - Non ZLB

Interest rate expectations (tbill6) - ZLB

4
4

0.977066
0.973417

0.000294
0.021034

0.008195
0.002322

0.014445
0.003227

Inflation rate - Non ZLB

Inflation rate - ZLB

4
4

0.027908

0.238670

0.962730
0.755750

0.006480
0.003863

0.002883
0.001717

Unemployment rate - Non ZLB

Unemployment rate - ZLB

4
4

0.118393

0.076128

0.005543
0.179542

0.860960
0.665330

0.015104
0.079000

Federal Funds rate - Non ZLB

Federal Funds rate - ZLB

4
4

0.493742
0.224465

0.004097
0.555390

0.126534
0.036243

0.375627
0.183902

Percentage of variation in the row variable explained by column variable

Period

expectations
Interest rate

Inflation

Unemployment

Federal Funds

Interest rate expectations - Non ZLB

Interest rate expectations - ZLB

20
20

0.919487

0.922222

0.000592
0.020141

0.053862
0.028635

0.026059
0.029008

Inflation rate - Non ZLB

Inflation rate - ZLB

20
20

0.035565
0.240477

0.940683
0.750361

0.020168
0.006248

0.003584
0.002915

Unemployment rate - Non ZLB

Unemployment rate - ZLB

20
20

0.073743

0.342002

0.005336
0.035606

0.816591
0.373720

0.104330
0.248672

Federal Funds rate - Non ZLB

Federal Funds rate - ZLB

20
20

0.569371

0.222187

0.000350
0.556288

0.185940
0.036088

0.241188
0.185437

Parameter

Percentage of variation in the row variable explained by column variable

Figure6:Variancedecomposition

44

Interest rate expectations

Interest rate expectations shock

0.8

Inflation rate shock

0.7

0.3

0.2

-0.2
0

0.15
0.05

-0.1

-0.03
0

0
-0.1
-0.15

0.14
0.12
0.1
0.08
0.06
0.04
0.02

0
3

0.16

0.1

0.18

0.05

0.2

-0.05
0

0.25

-0.2

-0.04

0.3

-0.15

-0.03

0.15

-0.05

-0.02

-0.1

-0.01
-0.02

-0.01

0.01

0.01

-0.05

0.02

0.1

0.02

0.05

0.03

0.25
0.2

0.03

0.04

0.1

0.6

0.2

-0.1

0
0

0.7

0.3

0.3

0.4

0.1

0.02

-0.1
-0.12

0.5

0.2

0.04

-0.08

0.06

-0.06

-0.04

0.3

Inflation rate

-0.04

-0.02

0.4

Unemployment rate

0.02
0

0.08

0
-0.02

0.1

0.02

0.04

0.1
0

0.04

0.06

0.4

Federal Funds rate shock

0.12

0.06

0.08

0.6
0.5

Unemployment rate shock

0.1

0
0

Federal Funds rate

0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
-0.05

0.2

0.05

0.15

0.1

-0.05

0.05

-0.1

-0.15

-0.05

-0.2

-0.1
0

0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05

-0.25
0

0
0

Figure7a:ImpulseResponseFunctions,95%confidenceintervalbandsgeneratedusing500
MonteCarlosimulations

Non ZLB (1981:Q3-2008:Q1)

45

ZLB (2008:Q2-2014:Q3)

0.16

0.25

0.2
0.15

Unemployment rate

Unemployment rate

0.18

Interest rate expectations (tbill6)

0.3

Federal Funds rate shock

Federal Funds rate shock

Interest rate expectations (tbill6) shock

0.1
0.05

0
-0.05
0

0.14
0.12
0.1
0.08
0.06
0.04
0.02

0.04
0.035
0.03
0.025
0.02
0.015
0.01
0.005
0

Figure7b:ImpulseResponseFunctions,usingFederalFundsrateasmonetarypolicytool

ZLB (2008:Q2-2014:Q3)
Yield curve slope shock

Interest rate expectations (tbill6) shock

0.4

Unemployment rate

Unemployment rate

0.7
0.6
0.5
0.4
0.3
0.2

0.3
0.2
0.1

0
2

0.15
0.05

0.25

0.1
0

0.35

Interest rate expectations (tbill6)

0.45

0.8

Yield curve slope shock

0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
0

Figure7c:ImpulseResponseFunctions,usingslopeoftheyieldcurveasmonetarypolicytool
ZLB (2008:Q2-2014:Q3)

Unemployment rate

0.25

0.2
0.15
0.1
0.05
0
-0.05

0.2

0.15

0.1
0.05

-0.1

Interest rate expectations (tbill6)

0.3
0.25

Unemployment rate

0.3

Shadow rate shock

Shadow rate shock

Interest rate expectations (tbill6) shock

0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
-0.02
0

Figure7d:ImpulseResponseFunctions,usingShadowRateasmonetarypolicytool
ZLB (2008:Q2-2014:Q3)
46

AugmentedModelsSelectImpulseResponseFunctions,95%ConfidenceIntervalBands
Generatedusing500MonteCarlosimulations

Interest rate expectations (tbill6) shock

0.35

0.6

0.3

0.4

Nominal Exchange rate

Nominal Exchange rate

Interest rate expectations (tbill6) shock

0.25

0.2

0.15

0.1
0.05

0
0

0.2
0
-0.2
-0.4
-0.6
-0.8
0

Non ZLB (1981:Q3-2008:Q1)

ZLB (2008:Q2-2014:Q3)

Figure8a:Additionofnominalexchangerate

Interest rate expectations (tbill6) shock

0

Unemployment rate

Unemployment rate

-0.02

-0.04

-0.06
-0.08
-0.1
-0.12
0

Interest rate expectations (tbill6) shock

0.2

0.15
0.1

0.05

-0.05

Non ZLB (1981:Q3-2008:Q1)

ZLB (2008:Q2-2014:Q3)

Figure8b:Additionofnominalexchangerate

47


Federal Funds rate shock

0.25

Nominal Exchange rate

Nominal Exchange rate

0.3

0.2

0.15

0.1

0.05
0

-0.05
0

Federal Funds rate shock

0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
-0.05
-0.1
0

Figure8c:Additionofnominalexchangerate
Non ZLB (1981:Q3-2008:Q1)

48

ZLB (2008:Q2-2014:Q3)


Interest rate expectations (tbill6) shock

Interest rate expectations (tbill6) shock

0.18

-0.02

0.16

Unemployment rate

Unemployment rate

-0.04

-0.06

-0.08

-0.1

-0.12
-0.14

0.14
0.12
0.1
0.08
0.06
0.04
0.02
0

ZLB (2008:Q2-2014:Q3)

Non ZLB (1981:Q3-2008:Q1)

Figure9a:Additionofexogenousoilprice

0.01

0.025

0.02

-0.01

-0.02

-0.03

-0.04

-0.05

0.03

Inflation rate

Federal Funds rate shock

Inflation rate

Federal Funds rate shock

0.015
0.01
0.005
0
-0.005
0

Non ZLB (1981:Q3-2008:Q1)

ZLB (2008:Q2-2014:Q3)

Figure9b:Additionofexogenousoilprice
49

Interest rate expectations (tbill6) shock

0.25

Ten year U.S. Treasury

Ten year U.S. Treasury

0.2

0.15

0.1

0.05

0
0

Interest rate expectations (tbill6) shock

0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
-0.02
-0.04
0

Non ZLB (1981:Q3-2008:Q1)

ZLB (2008:Q2-2014:Q3)

Figure10a:Additionof10YearU.S.TreasuryBill

Ten year U.S. Treasury shock

0.05

Unemployment rate

Unemployment rate

0.04
0.03
0.02
0.01
0

Non ZLB (1981:Q3-2008:Q1)

0.12
0.1

0.08

0.06

-0.02

0.14

-0.01

Ten year U.S. Treasury shock

0.04
0.02
0
0

50

ZLB (2008:Q2-2014:Q3)

Figure10b:Additionof10YearU.S.TreasuryBill


Interest rate expectations (tbill6) shock

0.2

-0.02

0.15

0.1

0.05

-0.05

-0.1

Unemployment rate

Unemployment rate

Interest rate expectations (tbill6) shock

-0.04
-0.06
-0.08
-0.1
-0.12
1

Non ZLB (1981:Q3-2008:Q1)

Figure10c:Additionof10YearU.S.TreasuryBill

51

ZLB (2008:Q2-2014:Q3)


Interest rate expectations (tbill6) shock

-0.02

0.14

0.12

-0.04

-0.06

-0.08

-0.1

0.16

Unemployment rate

Unemployment rate

Interest rate expectations (tbill6) shock

-0.12
0

0.1
0.08
0.06
0.04
0.02
0
0

ZLB (2008:Q2-2014:Q3)

Non ZLB (1981:Q3-2008:Q1)

Figure11a:Additionofexogenousmonetarybase

Federal Funds rate shock

0.06

0.03

0.05

0.025

0.04

0.03

0.02

0.01

Unemployment rate

Unemployment rate

Federal Funds rate shock

0.02
0.015
0.01
0.005
0
-0.005
0

Non ZLB (1981:Q3-2008:Q1)

ZLB (2008:Q2-2014:Q3)

Figure11b:Additionofexogenousmonetarybase

52


Monetary base shock
0.01

0.025

0.005

0.02

-0.005

-0.01

-0.015
-0.02

Inflation rate

Inflation rate

Monetary base shock

0.015
0.01
0.005

-0.025

-0.03
0

0
-0.005
0

Non ZLB (1981:Q3-2008:Q1)

ZLB (2008:Q2-2014:Q3)

Figure11c:Additionofexogenousmonetarybase

Monetary base shock

0.04

-0.005

-0.01

-0.015

-0.02

-0.025

0.005

Unemployment rate

Unemployment rate

Monetary base shock

-0.03
0

0.035
0.03
0.025
0.02
0.015
0.01

Non ZLB (1981:Q3-2008:Q1)

ZLB (2008:Q2-2014:Q3)

Figure11d:Additionofexogenousmonetarybase

53

Interest rate expectations (tbill6) shock

0.25

-0.02

0.2

-0.04

-0.06

-0.08

-0.1

-0.12
0

Unemployment rate

Unemployment rate

Interest rate expectations (tbill6) shock

0.15
0.1
0.05
0
0

ZLB (2008:Q2-2014:Q3)

Non ZLB (1981:Q3-2008:Q1)

Figure12a:AdditionofNonBorrowedReserves

Federal Funds rate shock

Unemployment rate

0.05

0.14
0.12

0.04

0.03

0.02

0.01

-0.01
0

Non ZLB (1981:Q3-2008:Q1)

0.16

Unemployment rate

0.06

Federal funds rate shock

0.1
0.08
0.06
0.04
0.02
0
0

ZLB (2008:Q2-2014:Q3)

Figure12b:AdditionofNonBorrowedReserves
54

Non-borrowed reserves shock

Non-borrowed reserves shock

0.03

0.06

0.02

0.05

Unemployment rate

Unemployment rate

0.04

0.03

0.02

0.01

0
-0.01
-0.02
-0.03
-0.04

0.01

ZLB (2008:Q2-2014:Q3)

Non ZLB (1981:Q3-2008:Q1)

Figure12c:AdditionofNonBorrowedReserves

Interest rate expectations (tbill6) shock

2.5
2

0.03

1
0.5

0
-0.5

-1

-1.5
-2

0.02

Unemployment rate

1.5

Unemployment rate

Interest rate expectations (tbill6) shock

-2.5
0

0.01
0
-0.01
-0.02
-0.03
-0.04
0

ZLB (2008:Q2-2014:Q3)

Non ZLB (1981:Q3-2008:Q1)

Figure13:LivingstonSurveydata

55