Keywords: Deflation, zero bound, monetary policy, term structure, policy expectations
Abstract: The success over the years in reducing inflation and, consequently, the average level of
nominal interest rates has increased the likelihood that the nominal policy interest rate
may become constrained by the zero lower bound. When that happens, a central bank
can no longer stimulate aggregate demand by further interest-rate reductions and must
rely on "non-standard" policy alternatives. To assess the potential effectiveness of such
policies, we analyze the behavior of selected asset prices over short periods surrounding
central bank statements or other types of financial or economic news and estimate "no-arbitrage"
models of the term structure for the United States and Japan. There is some
evidence that central bank communications can help to shape public expectations of
future policy actions and that asset purchases in large volume by a central bank would be
able to affect the price or yield of the targeted asset.
Full paper (586 KB PDF)
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Last update: September 20, 2004