Is current US monetary policy “too easy”?
A recent study by Wu & Xia gains traction in discussions on Fed and its extra-lose zero-rate policy augmented by unprecedented unconventional measures. The study is the extension of Fisher-Black (1995), which first suggested that zero percent is not the lower limit for nominal interest rates. Beyond the observed Fed Fund rate, the markets should evaluate the “shadow FF rate”, which can be explained as the difference between the nominal rate and the value of a call option on cash with zero percent return. Xia and Wu estimate the shadow rate at -3.0% in 2014.
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