The Fed's Re-Programming Strategy to Re-Energize the U.S. Economy During the Great Recession

Abstract

The main goal of the Fed’s unconventional monetary policy is to decrease the spread between the interest rate on government securities and the firms’borrowing cost to maintain these firms. As a result, zero lower bound interest rate is adopted. Thus, this paper seeks to introduce an analysis to the Feds’ reactions and procedures to counter the great recession of 2007-2008 in an economic model which contains the mechanism of zero lower bound. The paper utilizes a backward-looking model to achieve its goal. The paper shows that within the context of zero lower bound mechanism the relationship between the inflation rate and real GDP is unstable. At the same time, when the level of macroeconomic indictors’ are set-up at zero level, the main engine to push the economy forward is the monetary policy shocks As a result, the paper concludes that in such circumstances aggressive measures and reactions are a necessary procedure to prevent the economy from falling into a deflationary trap. Moreover, the paper introduces a scenario of how the economy can get out of the great recession within the paper’s model. Besides, the paper illustrates that the remedy process is an accurate and sensitive step to the reactions in the economy.