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Reviewing US Monetary Policy in Disinflation Era: A Primer

Author

Listed:
  • Ryo Kato

    (Bank of Japan)

  • Yoko Takeda

    (Bank of Japan)

Abstract

This paper reviews the experience of US monetary policy from 2000 to shed some light on issues regarding the effectiveness of monetary policy in a low inflation era. Our analysis is twofold. First, based on a simple inflation forecast targeting model introduced in Svensson (1997) and Kato and Nishiyama (2002) as its variant, we demonstrate that the actual federal funds rate closely followed its optimal path predicted by the model from the late 90s to mid-2003. Second, we examine the response of long-term interest rates or an implied forward curve to FOMC's policy changes by employing a version of the new IS/LM model. The result shows that the observed financial market response to the FOMC's statement released in August 2003 can be no less consistent with an effective change in the expectation of the degree of interest rate inertia than a failed policy commitment. Our simulation suggests that we cannot conclude that the Fed's commitment was ineffective during the recent phase of stagnation.

Suggested Citation

  • Ryo Kato & Yoko Takeda, 2004. "Reviewing US Monetary Policy in Disinflation Era: A Primer," Bank of Japan Working Paper Series 04-E-13, Bank of Japan.
    • Handle: RePEc:boj:bojwps:04-e-13
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2004/data/wp04e13.pdf
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    References listed on IDEAS

    as
    1. George W. Evans & Seppo Honkapohja, 2005. "Policy Interaction, Expectations and the Liquidity Trap," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 303-323, April.
    2. Kato, Ryo & Nishiyama, Shin-Ichi, 2005. "Optimal monetary policy when interest rates are bounded at zero," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 97-133, January.
    3. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    4. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    5. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(s1), pages 1-35.
    6. repec:zbw:bofrdp:2003_022 is not listed on IDEAS
    7. Lars E. O. Svensson & Michael Woodford, 2004. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Chapters, in: The Inflation-Targeting Debate, National Bureau of Economic Research, Inc.
    8. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, April.
    9. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    10. Currie,David & Levine,Paul, 2009. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521104609, January.
    11. Blinder, Alan S, 2000. "Monetary Policy at the Zero Lower Bound: Balancing the Risks: Summary Panel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 1093-1099, November.
    12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    13. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
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    Cited by:

    1. Fujiwara, Ippei & Nakazono, Yoshiyuki & Ueda, Kozo, 2015. "Policy regime change against chronic deflation? Policy option under a long-term liquidity trap," Journal of the Japanese and International Economies, Elsevier, vol. 37(C), pages 59-81.
    2. Ippei Fujiwara & Yoshiyuki Nakazono & Kozo Ueda, 2015. "Policy Regime Change Against Chronic Deflation?," Working Papers halshs-01545830, HAL.

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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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