Based on the liquidity premium theory of the term structure of interest rates, explain how forward guidance about monetary policy can lower long-term interest rates today. Be sure to account for both future short-term rates and for the risk premium. How does the effectiveness of forward guidance depend on its time consistency?
Answer to relevant QuestionsWith the policy interest rate at zero, how might a central bank counter unwanted deflation?How might the Federal Reserve exit from the unconventional policies it employed during the financial crisis of 2007-2009 without causing inflationary problems? Country A frequently experiences large business cycle swings. Under what conditions might it be appropriate for country A to dollarize? Use a supply and demand diagram for dollars to show the impact of an increase in U.S. interest rates relative to interest rates in the euro area in the wake of a foreign-exchange market intervention by the Federal Reserve.Assuming the country is open to international capital flows, which of the following combinations of monetary and exchange-rate policies are viable? Explain your reasoning.(a) A domestic interest rate as a policy instrument ...
Post your question