Targeting Constant Money Growth at the Zero Lower Bound

Abstract

Unconventional policy actions, including quantitative easing and forward guidance, taken during and since the financial crisis and Great Recession of 2007–09, allowed the Federal Reserve to influence long-term interest rates even after the federal funds rate hit its zero lower bound. Alternatively, similar policy actions could have been directed at stabilizing the growth rate of a monetary aggregate in the face of severe disruptions to the financial sector and the economy at large. A structural vector autoregression suggests it would have been feasible for the Fed to target the growth rate of a Divisia monetary aggregate once the federal funds rate had reached its zero lower bound and that doing so would have supported a stronger, more rapid recovery.

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