CFCM Seminar: Oliver De Groot (University of Liverpool)

Title: US Monetary Policy at the Height of the Financial Crisis: A Constrained Optimal Policy Projections Perspective

Abstract: We study the optimal mix of interest rate guidance and QE in the US using the information set available to the Fed in early 2009. To assess the implications of alternative assumptions, we develop an efficient method that handles commitment, limited-time commitment and discretion; multiple policy instruments and constraints on policy; alternative resolutions to the forward guidance puzzle; and does not require a fully specified general equilibrium model. We find interest rate guidance was near optimal; planned QE was insufficiently aggressive; and optimal unwinding of QE is slower under discretion than commitment. An extensive user-friendly toolkit accompanies the paper.

Authors: Oliver de Groot, Falk Mazelis, Roberto Motto, and Annukka Ristiniemi