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This paper employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. We show that such a model offers an excellent description of the data and can be used to summarize the macroeconomic effects of unconventional monetary policy at the zero lower bound. Our estimates imply that the efforts by the Federal Reserve to stimulate the economy since July 2009 succeeded in making the unemployment rate in December 2013 0.13 % lower than it otherwise would have been.

Elhanan Helpman and Kenneth Rogoff. Comments on an earlier draft are gratefully acknowledged. Thanks to Evgenia Passari, Nicolas Govillot for their help with the US data. Thanks to Gian Maria Milesi-Ferretti and Philip Lane for providing us with the 2010 update of their dataset. Thanks to the editors and discussants Vincenzo Quadrini and Paolo Pesenti as well as Maury Obstfeld for detailed comments. Rey gratefully acknowledges support from ERC

In recent years, the Federal Reserve has made substantial changes to its framework for monetary policymaking by providing greater clarity regarding its objectives, its intentions regarding the use of monetary policy — including nontraditional policy tools such as forward guidance and asset purchases—in the pursuit of those objectives, and its broader policy strategy. These changes reflected both a response to changes in economists ’ understanding of the most effective way to implement monetary policy and a response to specific challenges posed by the financial crisis and its aftermath, particularly the effective lower bound on nominal interest rates. We trace the recent evolution of the Federal Reserve’s framework, and use a small-scale macro model and a simple static model to help illuminate the approaches taken with nontraditional monetary policy tools. A number of foreign central banks have made similar innovations in response to similar developments. On balance, the Federal Reserve has moved closer to “flexible inflation targeting, ” but the Federal Reserve’s approach includes a balanced focus on two objectives and the use of a flexible horizon over which policy aims to foster those objectives. Going forward, further changes in central banks ’ frameworks may be needed to

discussions, while absolving them from responsibility for the arguments presented. I also thank Kyle

We explore a global game model of the impact of monetary policy shocks. Risk-neutral asset managers interact with risk-averse households in a market with a risky bond and a floating rate money market fund. Asset managers are averse to coming last in the ranking of short-term performance. This friction injects a coordination element in asset managers’ portfolio choice that leads to large jumps in risk premiums to small future anticipated changes in central bank policy rates. The size of the asset management sector is the key parameter determining the extent of market disruption to monetary policy shocks. ∗First version. Comments are most welcome. 1 1

We present a signalling theory of quantitative easing in which open market operations that change the duration of outstanding nominal government debt a¤ect the incentives of the central bank in determining the real interest rate. In a time consistent (Markov-perfect) equilibrium of a sticky-price model with coordinated monetary and …scal policy, we show that shortening the duration of outstanding government debt provides an incentive to the central bank to keep short-term real interest rates low in future in order to avoid capital losses. In a liquidity trap situation then, where the current short-term nominal interest rate is up against the zero lower bound, quantitative easing can be e¤ective to …ght deation and a negative output gap as it leads to lower real long-term interest rates by lowering future expected real short-term interest rates. We show illustrative numerical examples that suggest that the bene…ts of quantitative easing in a liquidity trap can be large in a way that is not fully captured by some recent empirical studies.

The e↵ectiveness of monetary policy depends, to a large extent, on market expec-tations of its future actions. In a standard New Keynesian business-cycle model with rational expectations, systematic monetary policy reduces the variance of in-flation and the output gap by at least two-thirds. These stabilization benefits can be substantially smaller if expectations are non-rational. We design an economic experiment that identifies the contribution of expectations to macroeconomic sta-bilization achieved by systematic monetary policy. We find that, despite some non-rational component in expectations formed by experiment participants, mon-etary policy is quite potent in providing stabilization, reducing macroeconomic variance by roughly half.

In 2013 all ECB publications feature a motif taken from the €5 banknote. NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. Acknowledgements We would like to thank our discussants Martin Bodenstein and Juha Kilponen, seminar participants at the Federal Reserve Board in

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