A Model of U.S. Monetary Policy Before and after the Great Recession

24 Pages Posted: 6 Oct 2015 Last revised: 24 Jul 2019

See all articles by David Andolfatto

David Andolfatto

Simon Fraser University (SFU) - Department of Economics; Federal Reserve Bank of St. Louis

Date Written: 2015

Abstract

The author studies a simple dynamic general equilibrium monetary model to interpret key macroeconomic developments in the U.S. economy both before and after the Great Recession. In normal times, when the Federal Reserve’s policy rate is above the interest paid on reserves, countercyclical monetary policy works in a textbook manner. When a shock drives the policy rate to the zero lower bound, the economy enters a liquidity-trap scenario in which open market purchases of government securities have no real or nominal effects, apart from expanding the supply of excess reserves in the banking sector. In a liquidity trap, the Fed loses all control of inflation, which is now determined entirely by the fiscal authority. In normal times, raising the interest paid on reserves stimulates economic activity, but in a liquidity trap, raising the interest paid on reserves retards economic activity.

JEL Classification: E4, E5

Suggested Citation

Andolfatto, David, A Model of U.S. Monetary Policy Before and after the Great Recession (2015). Review, Vol. 97, Issue 3, pp. 233-56, 2015, Available at SSRN: https://ssrn.com/abstract=2669849

David Andolfatto (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604 291-5825 (Phone)
604 291-5944 (Fax)

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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