Question

What unconventional measures were used during the Great Recession? How did they work? What did Fed chair say about continuing their use or returning to the conventional measures (specifically, paying interest on excess reserves or IOER). Discuss the role of expectations in setting monetary policy. https://www.federalreserve.gov/monetarypolicy/files/20180223_mprfullreport.pdf

Answer 1

Unconventional measures like bailouts were used which is used rarely. But so far as monetary policy is concerned quantitative easing was introduced in 2008.under this scheme fed purchased large volume of govt securities and bonds to reduce longterm interest rates. This was believed to reduce both short term borrowing costs and also borrowing cost of long term mortgages. Similarly fed introduced interest on excess reserves kept by banks with fed. This will increase profitability of banks. Fed is in no mood to reduce interest rate on excess reserves. The effect of monetary policy depend on expectations. If expectations are not rational stabilisation will be quite difficult to achieve. E. G during recession investment does not increase due to lower interest rate because there is overall pessimism.