Fed President Rosengren : Not Letting It (Deflation) Happen Here

While it may be too early to draw firm conclusions about monetary policy at the zero bound for short-term interest rates, I would like to draw some tentative conclusions.

• First, a policy of gradually adjusting monetary and fiscal policy, as conducted in Japan after deflation first occurred, may not be as effective as an active policy response taken before deflation has become embedded in the economy.  Of course, it should depend on the given situation and incoming data.

• Second, while monetary policy may have difficulty fully offsetting a severe shock when the zero bound is hit, there are still important channels for monetary policy to use to mitigate the negative shocks.

• Third, it is not a coincidence that in Japan, the United States, and Europe these economic problems have been encountered in conjunction with banking and financial market problems.  Analysis of monetary policy with the zero bound needs to more richly capture the aspects of the financial sector that are major contributors to economic difficulties.

• Finally, we all recognize that conducting unconventional monetary and fiscal policy at the zero bound requires political will.  This of course must be factored into any analysis of policy options.

Source : modeledbehavior