Skip to main content

Second Quarter 2016, 
Vol. 98, No. 2
Posted 2016-06-17

Permazero

by James Bullard

The financial crisis of 2007-09 and its aftermath turned monetary economics and policymaking on its head and called into question many of the conventional views held before the crisis. One of the most popular and enduring views in all of monetary economics since the 1970s, and indeed since the 1940s, has been that a nominal interest rate peg is poor monetary policy and that attempts to pursue such a policy would lead to ruin. Yet, post-crisis U.S. monetary policy could be interpreted as exactly that—an interest rate peg—and an extreme one at that, since the policy rate has remained near zero for nearly seven years. The author summarizes some recent academic work on the idea of a stable interest rate peg and what its implications may be for current monetary policy choices. He argues that a stable interest rate peg is a realistic theoretical possibility; that it has some mild empirical support based on a cursory look at the data; and that, should we find ourselves in a persistent state of low nominal interest rates and low inflation, some of our fundamental assumptions about how U.S. monetary policy works may have to be altered.