A Model of U.S. Monetary Policy Before and After the Great Recession
Bibliographic record
Abstract
he Great Recession of 2007-09 and its aftermath ushered in a new era for U.S. monetary policy.Prior to 2008, the Federal Reserve's policy rate stood in excess of 500 basis points.In 2008, the policy rate declined rapidly to 25 basis points, where it has remained ever since.Prior to 2008, the Fed's balance sheet stood at less than $1 trillion dollars-about 7 percent of gross domestic product (GDP).Fed security holdings and liabilities are presently near $4.5 trillion dollars-about 25 percent of GDP.Most of these liabilities exist as excess reserves in the banking system.Prior to 2008, excess reserves were essentially zero.The situation is so unusual that commentators frequently describe the Fed as sailing in uncharted waters.The U.S. economy has recovered steadily, if somewhat slowly, since the end of the Great Recession.After peaking at over 10 percent in 2009, the civilian unemployment rate at the time this article was written was close to 5.5 percent.Despite the more than fourfold increase in the supply of base money, personal consumption expenditures (PCE) inflation undershot the Fed's 2 percent target throughout much of the recovery.With inflation varying betweenThe author studies a simple dynamic general equilibrium monetary model to interpret key macroeconomic developments in the U.S. economy both before and after the Great Recession.In normal times, when the Federal Reserve's policy rate is above the interest paid on reserves, countercyclical monetary policy works in a textbook manner.When a shock drives the policy rate to the zero lower bound, the economy enters a liquidity-trap scenario in which open market purchases of government securities have no real or nominal effects, apart from expanding the supply of excess reserves in the banking sector.In a liquidity trap, the Fed loses all control of inflation, which is now determined entirely by the fiscal authority.In normal times, raising the interest paid on reserves stimulates economic activity, but in a liquidity trap, raising the interest paid on reserves retards economic activity.(JEL E4, E5)
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How this classification was reachedexpand
Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.000 | 0.000 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.000 | 0.000 |
| Science and technology studies | 0.000 | 0.000 |
| Scholarly communication | 0.000 | 0.000 |
| Open science | 0.000 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one teacher head, not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".