Is Unconventional Monetary Policy Stabilizing? Evidence From the Great Recession and Recovery Years

Is unconventional monetary policy stabilizing? With the Great Recession and the advent of COVID-19, this is a question macroeconomists should urgently answer. We estimate a medium-sized New Keynesian model using Bayesian techniques over a sample of data that spans from 1983:Q1 to 2019:Q4. Our focus is on the Great Recession and the recovery years. We distinguish between periods of con- ventional and unconventional monetary policy using the shadow rate of Wu and Xia (2016). We offer four main sets of substantive results. First, conditioned on monetary policy shocks, output and consumption constantly rise between 2008:Q1 and 2015:Q4, and quite significantly so, while hours worked modestly exceed their pre-recession level, and investment is mildly below its pre-2008 level. Second, conditioned on adverse and monetary policy shocks, the maximum declines in output, consumption, investment and hours are significantly smaller and occur sooner than conditioned on adverse shocks only. The effect of monetary policy on hours is particularly strong. Third, output, consumption and investment return to their pre-recession levels between one and two years sooner conditioned on both adverse and monetary policy shocks than on adverse shocks only. Fourth, our estimated model provides a relatively accurate description of the behavior of inflation during the Great Recession and recovery years despite its New Keynesian essence. Overall, our findings show that in light of extraordinary events like the Great Recession and COVID-19, unconventional policy tools could be a useful card in the hands of the Fed for stabilizing purposes in years to come.