How Effective Is Monetary Policy at the Zero Lower Bound? Identification through Industry Heterogeneity

Abstract

US monetary policy was constrained from 2008 to 2015 by the zero lower bound, during which the Federal Reserve would likely have lowered the federal funds rate further if it were able to. This paper uses industry-level data to examine how growth was affected. Despite the zero bound constraint, industries historically more sensitive to interest rates, such as construction, performed relatively well in comparison to industries not typically affected by monetary policy. Further evidence suggests that unconventional policy lowered the effective stance of policy below zero.

Inferring the Shadow Rate from Real Activity

“…As in Skaperdas (2016), our methodology follows from the observation that VARs can be used to measure the federal funds rate as an unobserved variable. Given a set of observed economic variables and previously estimated inter-relationships between these variables and the federal funds rate, we ask the following question: which interest rate path has the highest likelihood of being consistent with observed economic variables?…”