Risk Aversion and the Natural Interest Rate
One way to assess the stance of monetary policy is to assert that there is a natural interest rate (NIR), defined as the rate consistent with output being at its potential. Broadly speaking, monetary policy can be seen as expansionary if the policy rate is below the NIR with the gap between the rates measuring the extent of the policy stimulus. Of course, there are many challenges in defining and measuring the NIR, with various factors driving its value over time. A key factor that needs to be considered is the effect of uncertainty and risk aversion on households’ savings decisions. Households’ tolerance for risk tends to be lower during downturns, putting upward pressure on precautionary savings, and thereby downward pressure on the natural interest rate. In addition, uncertainty dictates how much precautionary savings responds to changes in risk aversion. So policymakers need to be aware that rate moves to offset adverse economic conditions that are appropriate in tranquil times may not be sufficient in times of high uncertainty.
Risk Aversion, Global Asset Prices, and Fed Tightening Signals
The global sell-off last May of emerging market equities and currencies of countries with high interest rates (“carry-trade” currencies) has been attributed to changes in the outlook for U.S. monetary policy, since the sell-off took place immediately following Chairman Bernanke’s May 22 comments concerning the future of the Fed’s asset purchase programs.
How Unconventional Are Large‑Scale Asset Purchases?
The large-scale asset purchases (LSAPs) undertaken by the Fed starting in late November 2008 are widely considered to be a form of “unconventional” monetary policy.
On the Design of Monetary and Macroprudential Policies
The financial crisis, recession, and slow recovery have emphasized the interactions between financial markets and the real economy.
More Than Meets the Eye: Some Fiscal Implications of Monetary Policy
In 2012, the Fed’s remittances to the U.S. Treasury amounted to $88.4 billion.
The Recent Bond Market Selloff in Historical Perspective
Long-term Treasury yields have risen sharply in recent months.
Do Treasury Term Premia Rise around Monetary Tightenings?
Some commentators have expressed concern that Treasury yields might rise sharply once the Federal Open Market Committee (FOMC) begins to raise the federal funds rate (FFR), worrying, in particular, about a sudden increase in Treasury term premia.
Why (or Why Not) Keep Paying Interest on Excess Reserves?
In the fall of 2008, the Fed added new policy tools to its portfolio of techniques for implementing monetary policy.
Nudging Inflation Expectations: An Experiment
Managing consumers’ inflation expectations is of critical importance to central banks in the conduct of monetary policy.
Just Released: Chairman Bernanke Returns to His Academic Roots, Part 2
his week, Federal Reserve Chairman Ben Bernanke completed his four-lecture series for undergraduate students at the George Washington School of Business in Washington, D.C.