The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. The consequences for the proper conduct of monetary policy of the existence of a lower bound of zero for overnight nominal interest rates has recently become a topic of lively interest. In Japan, the call rate (the overnight cash rate that is analogous to the federal funds rate in the U.S.) has been within 50 basis points of zero since October 1995, so that little room for further reductions in short-term nominal interest rates has existed since that time, and has been essentially equal to zero for most of the past four years. (See Figure 1 below.) At the same time, growth has remained anemic in Japan over this period, and prices have continued to fall, suggesting a need for monetary stimulus. Yet the usual remedy — lower short-term nominal interest rates — is plainly unavailable. Vigorous expansion of the monetary base (which, as shown in the figure, is now more than twice as large, relative to GDP, as in the early 1990s) has also seemed to do little to stimulate demand under these circumstances. The fact that the federal funds rate has now been reduced to only 1.25 percent in the U.S., while signs of recovery remain exceedingly fragile, has led many to wonder if the U.S.

This paper develops a quantitative monetary DSGE model that allows for financial intermediaries that face endogenous balance sheet constraints. We use the model to simulate a crisis that has some basic features of the current economic downturn. We then use the model to quantitatively assess the effect of direct central bank intermediation of private lending, which is the essence of the unconventional monetary policy that the Federal Reserve has developed to combat the subprime crisis. We show numerically how central bank credit policy might help moderate the simulated crisis. We then compute the optimal degree of central bank credit intervention in this scenario and also compute the welfare gains. 1 1

This paper reviews alternative options for monetary policy when the short-term interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates. We use a model of risk-averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level, slope and curvature term-structure risk. We find these Treasury factors historically were quite helpful for predicting both yields and excess returns over 1990-2007. The historical correlations are consistent with the claim that if the Fed were to sell off all its Treasury holdings of less than one-year maturity and use the proceeds to retire Treasury debt from the long end, on average over the 1990-2007 period this might have resulted in a 14-basis-point drop in the 10-year rate and an 11-basis-point increase in the 6-month rate. We also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009. Our estimates imply that at the zero lower bound, the policy would have the same potential to lower long-term yields without raising short-term yields.

We develop a canonical framework to think about credit market frictions and aggregate economic activity in the context of the current crisis. We use the framework to address two issues in particular: …rst, how disruptions in …nancial intermediation can induce a crisis that a¤ects real activity; and second, how various credit market interventions by the central bank and the Treasury of the type we have seen recently, might work to mitigate the crisis. We make use of earlier literature to develop our framework and characterize how very recent literature is incorporating insights from the crisis.

This paper considers whether monetary and fiscal policy may sensibly be formulated independently of one another, and argues that the reasons for the two to be interconnected go well beyond the familiar but unappealing possibility of using seignorage as a source of revenue for the government. Particular attention is given to the e#ects of fiscal policy upon the price level through the wealth e#ect of variations in the value of the public debt; such e#ects are shown to be consistent with rational expectations and frictionless financial markets, contrary to the doctrine of "Ricardian equivalence", in the case of "non-Ricardian" fiscal policy. In this case, the e#ects of variation in the composition of the public debt (as to maturity and degree of indexation) are considered, as well as the e#ects of growth in its overall size. A number of objections to the possibility of a non-Ricardian policy are considered, notably the assertions that it is not possible for a government to ref...

What kinds of assets should financial intermediaries be permitted to hold? What kinds of liabilities should they be allowed to issue? Should a government or a central bank offer explicit deposit insurance or implicit deposit insurance by acting as a lender of last resort? This paper reviews how tensions involving stability versus efficiency and regulation versus laissez faire have for centuries run through macroeconomic analysis of these questions. 1

We consider price level determination from the perspective of portfolio choice. Arbitrages among money balances, bonds, and investment goods determine their relative demands. Returns to real balance holdings (transactions services), the nominal interest rate, and after-tax returns to investment goods determine the relative values of nominal and real assets. Since expectations of government policies ultimately determine the expected returns to both nominal and real assets, monetary and fiscal policies jointly determine the price level. Special cases of the fiscal and monetary policies considered produce the quantity theory of money and the fiscal theory of the price level.

cas's contributions to remember that he did not work in a vacuum, and that among his many gifts is the ability to demonstrate by choice of engaging examples the importance for macroeconomic policy questions of making pre-existing ideas fit together. The Late 60's The late 1960's were good times to be a young macroeconomist. The stage had been set for general equilibrium models by the triumph of simultaneous equations as the language both for building theoretical models and for estimating them. Modigliani, Metzler, and Tobin had used small systems of simultaneous equations to pose and clarify a variety of macroeconomic issues, a development that represented real progress over the loose verbal discussions that had preceded Hicks's `Keynes and the Classics.' The Cowles Commission methodology had an immense impact on macroeconomics, by insisting on estimation procedures that respected a model's complete stochastic specification. By the late 60's, macroeconomic models were

ucas's contributions to remember that he did not work in a vacuum, and that among his many gifts is the ability to demonstrate by choice of engaging examples the importance for macroeconomic policy questions of making pre-existing ideas fit together. The Late 60's The late 1960's were good times to be a young macroeconomist. The stage had been set for general equilibrium models by the triumph of simultaneous equations as the language both for building theoretical models and for estimating them. Modigliani, Metzler, and Tobin had used small systems of simultaneous equations to pose and clarify a variety of macroeconomic issues, a development that represented real progress over the loose verbal discussions that had preceded Hicks's `Keynes and the Classics.' The Cowles Commission methodology had an immense impact on macroeconomics, by insisting on estimation procedures that respected a model's complete stochastic specification. By the late 60's, macroeconomic models wer

This paper considers four models in which immortal agents face idiosyncratic shocks and trade only a single risk-free asset over time. The four models specify this single asset to be private bonds, public bonds, public money, or private money respectively. I prove that, given an equilibrium in one of these economies, it is possible to pick the exogenous elements in the other three economies so that there is an outcome-equivalent equilibrium in each of them. (The term "exogenous variables" refers to the limits on private issue of money or bonds, or the supplies of publicly issued bonds or money.) I thank Shouyong Shi and Neil Wallace for great conversations about this paper; I thank Ed Nosal, Chris