low r and monetary policy

low r and monetary policy

You need to answer these question in the paper.

Economists believe that the long-run trend value of r* (or r-star) is lower now than it was in the past and is likely to remain low for the foreseeable future. Explain what economists believe to be the the causes of this development, the problem this development poses for monetary policy, and proposed solutions to that problem. In your paper, be sure to address the following points.

1) What do economists mean by r* (or r-star)?

2) What are possible reasons for the decline in the long-run trend value of r* and continued low r* in the future, according to economists?

3) What problem does a low long-run trend value of r* pose for monetary policy?

4) What solutions have been proposed to this problem? Be thorough. Discuss all the solutions mentioned in the readings.


The paper should be about six pages long, double-spaced, NOT including graphs. If your paper is shorter than that, it probably does not have everything that I want. If it is much longer than that, it is more than I want. It should be structured as a paper. It must have an introductory paragraph that introduces the topic and previews what you are going to say about it. Each paragraph should start with a topic sentence that tells the reader what that paragraph is about.

You should make specific references to relevant things in the readings, and quote from the readings as appropriate. If you fail to refer to something in one of the readings that is relevant for the assigned topic, I will reduce your grade on the paper. Avoid excessive discussion of things unrelated to your assigned topic.

Pay attention to the date a reading was published, for two reasons. First, you need to know whether a reading was written during the time the target overnight rate was “practically zero,” at the lower bound, or the time before that, or the time after. Look at Figure 4 in “Things I would have told you in class.” (The actual fed funds rate, plotted in the figure, indicates the level of the target.) The FOMC cut the target rate to practically zero at the end of 2008. They began to raise the target at the beginning of 2016. Second, economists’ view of some things, like the rate of growth of potential output, have evolved over time. If you don’t note which reading on a topic was written before versus after another one, you may become confused.

The relevant readings are:

19) The Natural Rate of Interest

20) Economic Growth and Monetary Policy

21) What is the New Normal for U.S. growth?

22) Is Slow Still the New Normal for GDP Growth?

23) Finding Normal: Natural Rates and Policy Prescriptions

24) Changing Labor Force Composition and the Natural Rate of Unemployment

27) What is the Optimal Inflation Rate?

28) Data Dependence and U.S. Monetary Policy

29) The Federal Reserve’s Unconventional Policies

30) A Review of the Fed’s Unconventional Monetary Policy

31) Monetary Policy in a Low R-star World

32) Why are Interest Rates So Low?

33) The Future Fortunes of R-star: Are They Really Rising?

34) Important Choices for the Federal Reserve in the Years Ahead

39) Sustaining Maximum Employment and Price Stability

40) How Much Could Negative Rates Have Helped the Recovery?

41) The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communications Practices

42) Federal Reserve Review of Monetary Policy Strategy, Tools, and Communications


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