Discussion paper

DP15365 Monetary Policy in the Next Recession?

In many advanced countries, lowering the policy rate to zero probably will be insufficient to counter the next conventional recession. We explore a range of new monetary policy (NMP) tools including forward guidance, balance sheet tools and negative interest rates. Reflecting the complex transmission of monetary policy, we examine each NMP’s impact on financial conditions indexes (FCIs) in eight advanced economies. We find: (1) the global component of financial conditions is quite important; (2) state-contingent forward guidance is the tool most associated with improved conditions; (3) policymakers typically implemented NMPs during stress periods, and this endogenous usage pattern makes any econometric assessment difficult; (4) NMPs generally were not sufficient to overcome the headwinds already present. This leads us to conclude that, while central bankers should work to incorporate NMP tools into their reaction function, they should be humble about their likely effectiveness.


Cecchetti, S, M Feroli, A Kashyap, C Mann and K Schoenholtz (2020), ‘DP15365 Monetary Policy in the Next Recession?‘, CEPR Discussion Paper No. 15365. CEPR Press, Paris & London. https://cepr.org/publications/dp15365