Author(s): Donato Masciandaro
Date published: Nov 2016
by Donato Masciandaro, Department of Economics and Baffi Carefin Centre, Bocconi University and SUERF
“Too little, too late” or “wait and see”: these are frequently the comments that the media use in observing the central banks' tendency in postponing and/or delaying interest rate decisions. The recent behavior of the Federal Reserve System (FED) is paradigmatic.
In the aftermath of the severest recession since the Second World War, the FED faces extraordinary challenges in designing and implementing monetary policy. The overall result has been massive monetary accommodation with interest rates close to zero, coupled with an exceptional expansion of the Fed's balance sheet. The so called Great Recession ended in June 2009, but seven years afterwards, the Fed is still delaying the process of going back to normal. Expansionary monetary policy has been implemented long after the recession ended, raising questions on the drivers and consequences of monetary inertia, i.e. in this case reluctance in leaving the ultra-expansionary monetary status quo to start a policy of interest rate normalization.
JEL-codes: E52, E58, E03
Keywords: Monetary Policy Inertia, Central Banking, Behavioral Economics
Download Full Text