Thursday, November 12, 2015

"Permazero," by Jim Bullard

Jim Bullard has given a talk on "Permazero." Jim frames the idea as follows:
We have, after all, been at the zero lower bound in the U.S. for seven years.  In addition, the FOMC has repeatedly stressed that any policy rate increase in coming quarters and years will likely be more gradual than either the 1994 cycle or the 2004‐2006 cycle.  In short, the FOMC is already committed to a very low nominal interest rate environment over the forecast horizon of two to three years.  Perhaps short‐term nominal rates will simply be low during this period, or perhaps the economy will encounter a negative shock that will propel policy back toward the zero lower bound.
So, liftoff (an increase in the Fed's policy rate) may or may not occur soon, but even if it does, it's quite possible that we could face a world of "permazero," i.e. low nominal interest rates for a very long time. Well, so what?
The thrust of this talk is to suppose, for the sake of argument, that the zero interest rate policy (ZIRP) or near‐ZIRP remains a persistent feature of the U.S. economy.  How should we think about monetary stabilization policy in such an environment?  What sorts of considerations should be paramount? Should we expect slow growth?  Will we continue to have low inflation, or will inflation rise?  Would we be at more risk of financial asset price volatility?  What types of concrete policy decisions could be made to cope with such an environment?  Would it require a rethinking of U.S. monetary policy?
I'll leave you to read the paper, which introduces some important policy ideas, I think.