THE OPTIMUM QUANTITY OF MONEY AND THE ZERO LOWER BOUND

Since 2008, the monetary base has more than quadrupled through the Federal Reserve’s quantitative easing (QE) programs, and yet inflation has shown no signs of accelerating. In fact, inflation has not even met the Fed’s announced 2 percent target, despite an essentially zero fed funds rate from 2009...

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Bibliographic Details
Published in:The Cato journal 2018-03, Vol.38 (2), p.429-445
Main Author: McCulloch, J. Huston
Format: Article
Language:English
Subjects:
Analysis
Balance sheets
Bank reserves
Borrowing
Central banks
Cost control
Economic models
Economics
Federal funding
Federal funds rate
Federal Reserve monetary policy
Inflation
Inflation (Economics)
Interest rates
Loans
Macroeconomics
Monetary policy
Money
Mortgage backed securities
Opportunity costs
Price levels
Quantity theory of money
Treasuries
United States
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Summary:Since 2008, the monetary base has more than quadrupled through the Federal Reserve’s quantitative easing (QE) programs, and yet inflation has shown no signs of accelerating. In fact, inflation has not even met the Fed’s announced 2 percent target, despite an essentially zero fed funds rate from 2009 to 2015. This is quite puzzling, both in terms of the traditional quantity theory of money and in terms of the Taylor rule approach to monetary policy.Before 2008, the Fed could accelerate or decelerate inflation by expanding or contracting the monetary base and therefore bank reserves with open market operations and repo loans to dealers. Since 2008, however, the Fed has paid interest on excess reserves (IOER) equal to or even higher than the effective federal funds rate. As a result, the banks are awash with excess reserves that have zero opportunity cost, and the Fed has lost its primary mode of control over the price level and inflation.
ISSN:0273-3072
1943-3468