The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment

76 Pages Posted: 12 May 2011 Last revised: 13 Oct 2016

See all articles by James D. Hamilton

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Jing Cynthia Wu

University of Notre Dame - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: May 17, 2011

Abstract

This paper reviews alternative options for monetary policy when the short-term interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates. We use a model of risk-averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level, slope and curvature term-structure risk. We find these Treasury factors historically were quite helpful for predicting both yields and excess returns over 1990-2007. The historical correlations are consistent with the claim that if in December of 2006, the Fed were to have sold off all its Treasury holdings of less than one-year maturity (about $400 billion) and use the proceeds to retire Treasury debt from the long end, this might have resulted in a 14-basis-point drop in the 10-year rate and an 11-basis-point increase in the 6-month rate. We also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009. Our estimates imply that at the zero lower bound, such a maturity swap would have the same effects as buying $400 billion in long-term maturities outright with newly created reserves, and could reduce the 10-year rate by 13 basis points without raising short-term yields.

JEL Classification: E43, E44, E52, E58

Suggested Citation

Hamilton, James D. and Wu, Jing Cynthia, The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment (May 17, 2011). Journal of Money, Credit, and Banking, Vol. 44, No. s1, 2012, Chicago Booth Research Paper No. 13-68, Available at SSRN: https://ssrn.com/abstract=1838546

James D. Hamilton

University of California at San Diego ( email )

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National Bureau of Economic Research (NBER)

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Jing Cynthia Wu (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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