Unconventional Monetary Policy: Evaluating the Macroeconomic Implications at the Zero Lower Bound

Abstract

The aim of this research is to quantify what e↵ects monetary policy have had on the U.S. economy in the period following the financial crisis in 2007-2008. To be able to estimate a consistent and reliable measure of the actual monetary policy stance, incorporating both conventional and unconventional policy actions, a shadow rate is estimated. The shadow rate is estimated by a Dynamic Factor Model combined with a Kalman-filter and an EM algorithm. The shadow rate stands robust to several tests, including model specifications and comparisons to Taylor rule recommendations, major QE events, and alternative shadow rates. Counterfactual paths are then calculated, being able to show how a set of macroeconomic variables would have evolved if there was no implementation of unconventional monetary policy. Results suggest that unconventional monetary policy succeeded in stimulating the economy, at its peak in 2012 decreasing unemployment by 115,000 people and almost doubling real GDP growth.