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Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound

Jing Cynthia Wu and Fan Dora Xia
CQER Working Paper 2014-2
June 2014

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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 percent lower than it otherwise would have been.

JEL classification: E43, E44, E52, E58

Key words: monetary policy, zero lower bound, unemployment, shadow rate, dynamic term structure model


The authors have benefited from extensive discussions with Jim Hamilton and Drew Creal. The authors also thank Jim Bullard, John Cochrane, Greg Duffee, Kinda Hachem, Leo Krippner, Randy Kroszner, Jun Ma, Jeff Russell, Frank Schorfheide, Eric Swanson, Ruey Tsay, Johannes Wieland, John Williams, and seminar and conference participants at Chicago Booth, UCSD, Federal Reserve Bank of St. Louis Applied Time Series Econometrics Workshop, Federal Reserve Bank of San Francisco ZLB workshop, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Boston, Federal Reserve Bank of Chicago, and Federal Reserve Bank of Dallas for helpful suggestions. Cynthia Wu gratefully acknowledges financial support from the IBM Faculty Research Fund at the University of Chicago Booth School of Business. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Jing Cynthia Wu, The University of Chicago Booth School of Business, 5807 South Woodlawn Avenue, Chicago, Illinois 60637, Cynthia.Wu@chicagobooth.edu or Fan Dora Xia, Department of Economics, University of California, San Diego, 9500 Gilman Drive, La Jolla, California 92093, faxia@ucsd.edu.

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