Monetary Policy, Financial Stability, and the Zero Lower Bound
Vice Chairman Stanley Fischer
At the Annual Meeting of the American Economic Association, San Francisco, California
FRB, January 3, 2016
Thank you. It is a great pleasure to be here today and to participate in this panel together with such a distinguished group.
Much has happened in the world of central banking in the past 10 years. The list of challenges we face is long and includes fundamental issues such as lender-of-last-resort policies in the modern financial system, the role of central banks in the supervision of the financial sector, and the appropriate role of forward guidance in monetary policy communications. Those are the topics I will not discuss today.
Rather, I will focus primarily on three related issues associated with the zero lower bound (ZLB) on nominal interest rates and the nexus between monetary policy and financial stability: first, whether we are moving toward a permanently lower long-run equilibrium real interest rate; second, what steps can be taken to mitigate the constraints imposed by the ZLB on the short-term interest rate; and, third, whether and how central banks should incorporate financial stability considerations in the conduct of monetary policy.
Are We Moving Toward a World With a Permanently Lower Long-Run Equilibrium Real Interest Rate?
We start with a key question of the day: Are we moving toward a world with a permanently lower long-run equilibrium real interest rate? The equilibrium real interest rate–more conveniently known as r*–is the level of the short-term real rate that is consistent with full utilization of resources. It is often measured as the hypothetical real rate that would prevail in the long-run once all of the shocks affecting the economy die down.2 In terms of the Federal Reserve’s approach to monetary policy, it is the real interest rate at which the economy would settle at full employment and with inflation at 2 percent–provided the economy is not at the ZLB.
Full speech at Monetary Policy, Financial Stability, and the Zero Lower Bound
Or… their use remained blocked by ideologues.
My personal view is that rates got pushed to zero due to failed fiscal policy. As Raising the Equilibrium Real Rate mentioned, you can create demand with things like infrastructure spending. I’d add that you could also not layoff tons of government employees in the middle of a huge recession.
Pushing down interest rates to make cheap money available is like pushing on a string if you’re trying to fix a demand constrained economy that just had a credit bubble burst. Who’s going to take on more debt when the sky is falling? Where’s that money going to go? Most of it isn’t going to go to hiring.
I’m not saying pushing to zero was wrong policy for the Federal Reserve. I’m just saying they had to make up for failed fiscal policy. Monetary policy was an inefficient way to deal the weak demand during the Great Recession. Better than nothing, but upsetting that we had to rely so much on Federal Reserve action due to obstructionism in Congress. Hell, certain members of Congress wanted to obstruct the Fed. Glad they didn’t get their way.