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Methods of Policy Accommodation at the Interest-Rate Lower Bound 

There is huge uncertainty about future budget deficits and their financing. Economists disagree about how quickly deficits should be reduced: some would stress deflation risks and others inflation risks. Even if economists were to agree, there would still be great uncertainty about political choices on macroeconomic policy. It is nevertheless certain that government debt/GDP ratios in major countries will continue to rise over the next few years. Even the optimistic G20 pronouncements do not envisage debt/GDP ratios in the advanced countries stabilising before 2016. Graph 3 shows projections for the United Kingdom: according to estimates prepared before the recent election,. | Embargoed until presentation time of 11 10 a.m. Mountain Daylight Time Friday August 31 2012. Methods of Policy Accommodation at the Interest-Rate Lower Bound Michael Woodford Columbia University August 20 2012 To be presented at the Jackson Hole Symposium The Changing Policy Landscape August 31-September 1 2012 I would like to thank James Bullard Vasco Cúrdia Charles Evans Jonas Fisher Argia Sbordone Lars Svensson Eric Swanson and John Williams for helpful discussions Kyle Jurado for research assistance and the National Science Foundation for supporting my research on this issue under grant number SES-0820438. The opinions expressed are those of the author alone and do not represent the views of the Federal Reserve Bank of New York the Federal Reserve System or Sveriges Riksbank. Embargoed until presentation time of 11 10 a.m. Mountain Daylight Time Friday August 31 2012. Recent events have confronted many of the world s leading central banks with a situation that was regarded a few decades ago as merely a theoretical curiosity a situation in which they have reached a lower bound on the level to which they are able to push overnight interest rates despite an undesirably low level of capacity utilization and low inflation or even fears of deflation. The theoretical possibility of reaching such a situation first became an all-too-real challenge for the Bank of Japan in the late 1990s when even an eventual reduction of the BOJ s target for the call rate the overnight rate that had been its operating target until then to zero was insufficient to halt deflation in Japan. But in the wake of the global financial crisis other central banks notably including the Federal Reserve have found that even reductions of their policy rates to the lowest levels that they are willing to contemplate have been insufficient to spur satisfactory recoveries. Most worrisome of all for the Fed is the fact that as with Japan the situation has proven not to be merely a momentary anomaly .