Comments and Discussion

Benjamin M. Friedman: This paper by Ben Bernanke, Vincent Reinhart, and Brian Sack is a welcome contribution to the new line of literature that examines, in a far more eclectic way than used to be done, how monetary policy works and what effects it has on the financial markets and the non-financial economy. The paper is valuable both because the question it asks is important—whether what the authors call nonstandard policy measures can be effective when ordinary monetary policy actions are constrained by the zero lower bound on short-term nominal interest rates—and because the analysis it brings to bear on this question is largely empirical. The paper also reaches what I regard as a sensible conclusion: that the potential efficacy of these nonstandard measures notwithstanding, it is wise for monetary policy both to aim at an inflation rate distinctly above zero, so as to allow for a buffer against disinflationary shocks, and to ease policy preemptively when necessary to avoid significant risk of hitting the zero lower bound on interest rates. Finally, the paper is important also because of who wrote it, but more on that below.

The authors consider three conceptually distinct classes of nonstandard monetary policy measures: central bank communications, changes in the size of the central bank's balance sheet, and changes in the composition of the central bank's balance sheet. (The last of these is what would normally be called debt management policy if it were executed by a country's fiscal authority rather than by its central bank.) It is important to point out, however—and this is the focus of my one major concern about the paper—that even when the authors are addressing the effects of changes in the size or composition of the central bank's balance sheet, what they are actually analyzing in their empirical work is still communications. Most of their empirical exercises focus not on policy actions but on official statements regarding intended future actions. Even when they examine such episodes as the U.S. Treasury's buyback of Treasury securities, during the happy but all-too-brief period in the late 1990s when the U.S. government ran surprisingly large budget surpluses instead of shamefully large deficits, their attention is more on what the Treasury said than on what it did.

In principle, of course, credible statements about future actions should matter for the pricing of medium- and long-term assets in speculative markets. The ground for concern is rather in how this approach to addressing questions of monetary policy reinforces the increasingly exclusive focus in recent literature on what many economists engaged in this line of research (for example, Gauti Eggertsson and Michael Woodford in a Brookings Paper last year)¹ call "expectations management."

Surely everyone today believes that expectations matter, and therefore that whatever influences the public's expectations, including communication from the central bank, matters as well. I am also sympathetic to the authors' presumption that, when an economy has reached the zero lower bound on short-term interest rates, central bank communications may be even more important than normally. But the net impression, delivered both by the authors' discussion and by the battery of empirical tests they perform, nonetheless resonates too strongly, at least for my taste, with the idea, which they attribute to Eggertsson and Woodford, that "shaping the interest rate expectations of the public is essentially the only tool that central bankers have—not only when the ZLB binds, but under normal conditions as well." (I will not repeat here my criticism of this view, but interested readers can refer to my remarks as a discussant of the Eggertsson-Woodford paper.)

This concern aside, I regard the authors' empirical analysis of the effect of Federal Reserve and Treasury statements on market interest rates as carefully crafted, and I find their conclusions easily credible. I especially admire their willingness to go beyond the standard event studies and use a multifactor term structure model to try to identify the role of "surprise" elements of Federal Reserve statements, as distinct from the policy actions that these...