Reopening the Coronavirus-Closed Economy

The Federal Reserve’s current monetary policy framework combines conventional policy that sets the level of the federal funds rate with policies that operate through the slope of the term structure, including forward guidance and large-scale asset purchases. These slope policies are particularly important when the federal funds rate is at the zero lower bound. We assess the performance of counterfactual monetary policies since the Great Recession using a structural vector autoregression, identified using high-frequency jumps in asset prices around FOMC meetings as external instruments. We find that slope policies played an important role in supporting the recovery, but only partially circumvented the zero lower bound. In our simulations, earlier and more aggressive use of slope policies supports a faster recovery. The recovery would also have been faster, with the unemployment gap closing seven quarters earlier, if the Fed had inherited a higher level of inflation and nominal interest rates consistent witha3percent inflation target coming into the financial crisis recession.